The two charts below are about one year old. The current average cost of a Big Mac is $4.80 in the United States according to the Economist. The price has risen by 5.3% since last July and 11% since the beginning of 2013. Meanwhile, the government drones at the Bureau of Lies and Shams tell us that inflation is only up by 2% since last July and up only 3.5% since the beginning of 2013. Which figures do you think are more reflective of what you are paying in the real world? I grocery shop every Sunday morning and I know for a fact my bill is up by 30% since the beginning of 2013.
The propaganda spewed by the government, bankers, and media is wearing thin on the average American. Only the dumbest of asses can’t figure out that inflation is running at 5% to 10% on everything we need to live our day to day lives. The article below is from one year ago and captures the reality of understating inflation.
Why the ‘Big Mac’s’ Rising Prices Are More Alarming Than Its Fat Content
July 17th, 2013
by James Cornehlsen
Note: I’ve updated my periodic look at the Consumer Price Index (CPI) versus the Big Mac Index to coincide with The Economist’s bi-annual update of the Big Mac Index used for currency values.In a time when price hikes are commonplace, I took a step back and realized that some prices are rising more than others. The price of a Big Mac, for instance, has risen faster than the official rise in consumer prices and has been doing so since the late ’90s. In 1998, the average price of a Big Mac was about $2.50. Today, the average Big Mac is $4.56. If we were using the Consumer Price Index (CPI), the price of a Big Mac today should be about $3.40.
Believe it or not, the price hikes represented by the Big Mac will impact you more than the saturated fats in popular burger. By understanding the price disparities, you can make better decisions for you and your clients. The rise in the price of the Big Mac foreshadows how the printing of money is eroding the financial system’s arterial walls. The impact is broad based:
- Each dollar we own is buying less.
- For individuals relying on Social Security, the compensation for inflation is not keeping up with the prices people actually pay.
- The price of bonds should be much lower if interest rates fully accounted for the rise of inflation based on the Big Mac.
- The official economic growth rate would be lower now if prices were based on the Big Mac index.
Using the Big Mac Index to Measure Inflation
The Economistcreated the Big Mac Index in 1986. The Big Mac Index was created to compare the price of currencies between different countries. The index is based on a theory called purchasing power parity. This theory looks at the same basket of goods in each country and then adjusts for the interest rate one would pay for a loan or get for a savings account. This adjustment for interest rates makes the price of a Big Mac comparable in each country. The Big Mac Index just has one item. However, since the one item contains beef, dairy (cheese), wheat (bun), cost of labor, and the cost of real estate, I believe it is a good representation of prices in the United States and abroad.
Rather than use the Big Mac Index for comparing the value of currencies between countries, let’s take the price of the Big Mac each year within the US to see how it changes over time. You could also use this approach to look at the trend of prices for other countries as well.
By graphing the trend of the Big Mac Index each year since 1986, we see that prices have accelerated much faster than the official prices reported Consumer Price Index (CPI) – Bureau of Labor Statistics. On the Bureau of Labor Statistics’ website, CPI is defined as “a measure of the average change over time in the prices paid by consumers for a market basket of consumer goods and services. The basket includes food & beverages, housing, apparel, transportation, medical care, recreation, education & communication, and other goods & services.” However, there are two broad concerns with the CPI. First, CPI accounts for the substitution effect whereby if the price of beef increases, it is assumed that fewer people will buy beef and will instead buy chicken. Second, there is a “chained” effect, meaning the basket of goods isn’t consistent from one time period to the next. The reason for this is that it is believed people change their spending habits as prices change, which is why the Bureau of Labor Statistics revised CPI to account for substitution and the “chained” effect.
Since 1986, the price of a Big Mac has increased 185% from $1.60 to $4.56 today. During this same time period, the CPI has increased at a much lower rate of 110%. More disconcerting is the effect of the aggressive adjustment of monetary policy by the Federal Reserve, which began in 1999. This policy shift started with the Asian Crisis and Long Term Capital Management, followed by the Internet bubble, housing bubble, and Great Recession, and now the “New Normal” of zero federal funds rates and quantitative easing. In the context of these Fed policies, the rate of price increases for the Big Mac is almost three times greater than the official CPI.
In 1986, $1 would have purchased more than half of a Big Mac. Today you would have to cut the Big Mac into five pieces and only eat one of the five pieces for $1. Consequently, each dollar we have is buying a lot less.
Hidden Cuts to Benefits
So how does this price disparity play out in retirement benefits? Individuals receiving Social Security benefits are provided a cost of living adjustment based on the cost of living index. This index is based on the CPI. If an individual received $1,000 per month in 1999, they are receiving $1,360 today. In contrast, if the Big Mac Index were used, beneficiaries would receive $1,770. By using the CPI, the government is paying out $410 less than they would otherwise pay based on the rise in the price of a Big Mac. Throughout history, it has always been much easier for governments to quietly inflate away their excess liabilities rather than attempt outright cuts and painful austerity. The streets of Europe are a present day example of the social difficulty of outright cuts. By understating inflation, the federal government is effectively reducing the amount owed to retirees and thereby cutting the long-term deficit.
Bond Prices and Inflation
And what about bond prices and inflation? In a normal market, the price of bonds should reflect the rate of inflation. Ed Easterling, founder of Crestmont Research, links inflation to the rate of interest rates. By printing money to buy bonds, the government has pushed the interest rate of a 10-year government bond down to about 2.61%. However, Ed Easterling shows that the 10-year government bond rate should be about 1% above inflation. The current rate of inflation reported by CPI is 1.1%. Adding 1% for the increased risk of holding a bond for 10 years gives you a rate of at least 3.7%, and that’s using official inflation estimates. However, if we base our calculation on the Big Mac Index, inflation is 5.3% and adding 1% to that for the risk of holding a bond for 10 years gets a rate of 6.3%. The current interest rate of a government bond is 2.61%, but if we were to account for inflation as seen by the rise in the price of a Big Mac, the interest rate would be 5.3%. Consequently, if 10-year government bonds were to increase from 2.6% to 6.3%, bond indices would decline by about 32%. In other words, long duration, 10-year government bonds are overvalued by about 32% mainly due to persistent intervention (manipulation) by the Federal Reserve.
Propping Up GDP Numbers by Underestimating Inflation
Lastly, let’s look at Gross Domestic Product (GDP). GDP is the measure used for the growth rate of the overall economy. GDP is adjusted for inflation. An understatement of assumed inflation makes the reported GDP headline number look better, and conversely an overstatement makes the calculated growth rate look worse. Using the Big Mac Index instead of the official CPI would reduce the latest GDP growth rate of 1.8% and cause the report to show that GDP declined. Consequently, economic growth looks stronger using CPI rather than the Big Mac Index.
As a result, investors are being penalized (mostly without their knowledge) with higher inflation, lower income from bonds and certificates of deposit and being led to believe that the economy is growing better than it really is.
The risk of too much debt around the world, but specifically in Europe, is reducing the growth outlook for companies. In China, the government has cut spending to keep inflation in check and their economy is now slowing down. In the last 13 years, three bubbles have emerged, each funded by the government and each artificially lowering interest rates by printing money. Each subsequent contraction has been worse than the last. Why should this latest bout of artificial growth, which is even steeper than the previous three, end differently?
This story originally ran in Dunn Warren Investment Advisors’ December Newsletter.
Not to be confused with the type of inflation a Wendy’s burger may cause…..
[img
?1366670166[/img]
I should change my post name to “Endless Repeat” – far more appropriate.
Admin and others are accurate regards inflation and many other issues. But I always cut to the chase. We can’t save our ourselves, our country, and future without a educated public that is willing to toss out the current corrupt political system and attempt to build a better system.
As always the problem is big money influence and uninformed citizens all of whom care more about getting their piece of the budget pie (government subsidies/ tax breaks, bailouts, etc.) than they do about the country as a whole.
Stock market gains propped up by the federal reserve do NOT indicate that our economy is fine. As Adam Smith concluded in his “Wealth of Nations”, individual self-interest is beneficial only if it contributes to the prosperity of a entire nation and the greater good. This does NOT mean forced wealth redistribution but DOES mean reducing the stranglehold of big money over government.
Everyone should have a place at the table to promote the greater good by promoting the opportunity to prosper. Unfortunately, public apathy (and a tolerance to be exploited and bribed by government subsidies) means major reform is unlikely. So the middle class will keep getting weaker because citizens simply won’t stand up for themselves, their kids, and grand kids.
Unless a miracle happens or somehow many people wake up to force real reforms starting by replacing both democrats and republicans with outsiders not controlled by big money, things will continue to get worse for most – and our country.
Sneaky Ways Food Companies Make You Eat Price Increases
Marine Cole
Monday, 14 Jul 2014 | 8:37 AM ET
Fiscal Times
With food prices rising, food manufacturers are making sure consumers stomach the extra costs.
Almost all perishable foods—dairy, meats, fruits and vegetables—have seen price increases because of the drought out West, continued high oil and gas prices and diseases affecting crops or livestock.
The Bureau of Labor Statistics says the price of a pound of ground beef increased 16.5 percent to $3.85 in May compared with a year earlier. In the same period, a pound of Navel oranges increased 28.1 percent to $1.34, while a pound of American cheese increased 11.1 percent to $4.51.
Food manufacturers rarely want to eat price increases because they don’t want to gamble on whether and when prices will return to normal previous levels. “It might make sense in the short run if one anticipates the cost increase will be temporary, but it’s more difficult to accept in the long run as it will reduce the profits of the company,” said John Gourville, professor of business administration at Harvard Business School.
Instead, food manufacturers have adopted new tactics within the past decade, some more deceptive than others:
Simply raise prices. While it seems the easiest action to take from a company’s standpoint, consumers pay great attention to price increases and may change their purchasing habits as a result. “Shoppers are price conscious and will spot the increase,” noted Edgar Dworsky, founder of ConsumerWorld.org, a consumer resource guide.
Reduce the size of their products. Whether experts call it “downsizing price increase” or “obscured-inflation,” it usually consists of reducing the amount of product in the package. It’s typically done with coffee, ice cream, sodas or cookies.
“The price increases are mostly disguised using smaller portions such as half-liter soda bottles instead of 20 ounces,” said Thomas J. Alexander, associate professor of finance at Northwood University, which is based in Midland, Mich. “You can’t even find a real half-gallon of ice cream anymore.”
This option works if consumers don’t notice the size change, or notice it but care more about price than sizing. In any case, it’s often the option that gets the most press. “It seems the most deceptive,” said Gourville.
Disguise downsizing or a price increase by releasing a new version of a product. A variant of the above-mentioned option consists of changing the physical makeup of a product or its container while reducing its size and in some cases also increasing its price.
For example, a package of Keebler’s Chips Deluxe cookies recently went from 13.3 ounces to 11.6 ounces, but before Kellogg’s went ahead and reduced the size, it made sure it first changed the look of its packaging so the size decrease wouldn’t be as noticeable.
“Obviously, if you are paying the same price but getting less, that is a backdoor way of raising the price,” said Dworsky. “It is very sneaky.”
He recommends that consumers fight back either by writing to food manufacturers to complain when they spot a product that was downsized, or by looking for competing products that haven’t yet downsized.
“My advice is that we have to become not just price conscious, but also weight conscious,” he said.
It’s not just food. Been prepping for years and we replace items as we use them. Things like soap, toothpaste, cleaning items etc are also being downsized.
Buying food and personal care consumer items in bulk is one of the best financial methods to increase the return on your money, plus you pay no income tax on the “profit”. We have been doing it for a few years now and keeping track. Where else can you get a double digit return on your money with no risk?
I noticed Gatorade is now selling their products in 28 ounces rather then 32 in some stores.
You can put a HUGE dent in your food bill by buying less “finished goods”, and more single whole items (although those prices are rising also.)
For example, we had tacos for dinner today. The ground beef requires “taco seasoning”;
[/img]
[img
That costs about $1.50 at ShopRite. It’s just 1.5 ounces … and only has 5 spices. I made my own spice-mix using 7 spices, and in the proportions that suits ME …. in about 45 seconds ….. and I imagine the cost to me was 15 cents, max.
I love baba ganoush (eggplant and tahini and spices). The Russian deli charges $5 for a rather small container. I buy 3 eggplants and I have two quarts of the stuff!
With two $1 cans of chick peas I can make $20 worth of humus.
A five pound bag of flour and sugar ($10) and other cheap ingredients, and I can make $150 worth of baked goods.
And so on. Of course it does take effort and time (but not as much as you might think). But, yeah, you can save a small fortune making your own stuff.
Do you recall that Carl’s Jr commercial where doofus pokes a package of hamburger? The narrator says, without us, some guys would starve.
Actually, it would be women who would starve, they can’t cook shit. Mamas teach their sons to cook and watch kids since modern fems are totally useless in any traditional capacity save spreading the love, heh.
I was only half kidding when I told my carpool buddy, I’m going to write a cookbook for the Jenny Rivera crowd (see drunk chick on bench).
Easy recipes, e.g. guacamole: take avocado, smash it on a plate, remove peel, done.
Five pound bag of sugar is now a four pound bag of sugar. Nearly all containers of food have shrunk.
“Five pound bag of sugar is now a four pound bag of sugar.” —- Welshman says:
I’m thinking to myself, “bullshit”.
So, I get my fat ass off the chair and to the cupboard …. and SURE AS SHIT, it’s four pounds!! Jeezus H., I never even noticed that. Amazing.
Hi Stucky,
Completely agree. We just soaked and cooked some chickpeas from the dried version for hummus. A lot cheaper than canned and no BPA from the white plastic lining in almost all canned goods produced in the USA, Australia, New Zealand.
Interestingly, the canned goods imported to New Zealand from Italy, as an example, do not have the plastic lining. So Italian grown tomatoes without the BPA for the same price as the US conglomerate corporate version. Not a hard choice!
I first noticed “product shrinkage” in Great Britain back in the late 70’s..
We went into a local grocery store and everything was sized to fit a dollhouse (or so it seemed)!.
Also, back then they stopped the overseas tax exemption for Americans overseas, So I re-wrote my contract to evaluate the dollar depreciation versus the pound and fixed it so that paying 1/3 money in dollars for 30% less product didn’t bruise my wallet.
Now it’s happening here (in Spades) and since the dollar is all we have to use as a medium of exchange we hold the dollar “stable” by fiddling the accounting, cherry pick the prices to use to compute the imputed depreciation of the dollar, inflate by shrinking product size and we’re screwed.
So it has ever been with fiat money and ours is no different.
MA
Ah, but how much of the Big Mac is now sawdust instead of meat(like substance)?
I can’t believe people are not noticing the MARKED deterioration of the taste of our food.
The crap that so many call “food” is unbelievable, the crap put into said “food” is deadly.
And we just cannot get enough of it.
I buy mainly in bulk and so see the price increases/size shrinking readily. I also taste the deterioration of the ingredients because I don’t eat much processed foods anymore.
It is kinda sad to say, but I owe a debt of gratitude to the Chinese producers and ‘murkin importers that killed my dog, pushed through toxins as food products, and stole my customers’ jobs. Had those things not happened, I might never have pulled my head from my ass and opened my eyes.
@Stuck, not only is your spice mix cheaper, it is MUCH healthier. I recently learned that “natural flavorings” means a chemically derived product, and almost all “natural flavorings” have MSG, or other close chemical, as their base.
I’m afraid that for many ‘murkins “cooking” from a spice packet is just too hard. Hence the ever-increasing Hamburger Helper type meals popping up in every department. When I eat that crap all I taste is chemicals, yuck