Tags: Big | Mac | 7 | Index

Fed Believes Big Macs Should Cost $7 for New Retirees

By    |   Friday, 21 Dec 2012 07:37 AM

Big Macs, the signature product at McDonald’s around the world, can be used as a price index. The Economist magazine publishes an annual price index that compares the cost of a Big Mac around the world. Based solely on the local price of a hamburger, The Economist can determine whether a currency is overvalued or undervalued.

The most recent data for the Big Mac Index show that the average price for the 550-calorie sandwich in the United States is $4.33. In China, the cost is only $2.45, but it is $7.06 in Norway. This data indicate the currency of China is undervalued, while the Norwegian kroner is overvalued.

If the policies of the Federal Reserve are successful, U.S. consumers retiring today will be paying $7 for a Big Mac during their lifetime.

The average life expectancy of someone turning 65 is about 20 years. The Fed has promised to keep interest rates low as long as inflation remains low, which it defines as 2.5 percent a year.

If inflation stays low, prices rise slowly, but the rise is relentless. Over 20 years, prices would increase by 64 percent if inflation averages 2.5 percent.

Incomes may not keep up with inflation. The fiscal cliff is forcing a debate on ways to lower cost-of-living increases for retirees at a time when the Fed is trying to maintain steady inflation expectations. Inflation could push the price of that Big Mac well beyond $7, but there is no guarantee that wages or Social Security will rise at that same pace.

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MichaelCarr
Big Macs, the signature product at McDonald’s around the world, can be used as a price index. The Economist magazine publishes an annual price index that compares the cost of a Big Mac around the world.
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Friday, 21 Dec 2012 07:37 AM
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