In 1993, McDonald’s Big Mac hamburgers sold at a bargain of 99 cents in Southern California. Fast forward to 2017 and you will find that Big Macs cost around 5.06 USD nowadays – a 411% price increase from 1993.
Higher prices (inflation) are a natural consequence of our ever increasing monetary supply and the U.S. Department of Labor tracks those increases via a basket of common consumer goods which is known as the Consumer Price Index.
The CPI estimates that average consumer prices between 1993 and 2017 increased by 66%, which would theoretically price today’s Big Macs at around 1.66 USD rather than the 5.06 USD it actually costs to buy a Big Mac now.
Further research from The Economist’s Big Mac index showed that Southern California’s 99 cent special was a local anomaly and the average 1993 Big Mac price across the U.S was 2.28 USD. The CPI’s 66% price increase would thereby place Big Macs at a theoretical 3.78 USD today.
Getting less for your money.
The CPI reported a 66% price increase from 2.28 USD to 3.78 USD since 1993, actual Big Mac prices surged 122% over the same period.
Undoubtedly, the CPI tracks many products and will not match Big Mac prices exactly. However, Big Macs represent a highly standardized and widely consumed food item making its price changes roughly in line with the CPI.
This CPI vs. Big Mac discrepancy is just an example to highlight how the real cost of living seems to be consistently increasing at a faster rate than the CPI. Over time, it is becoming harder to make ends meet if your income is CPI adjusted.
Hence the question:
Is the CPI understating price increases in the real world ?
A look into how the CPI is calculated will reveal that the CPI goods definition has been routinely modified since the 1990s resulting in lower reported price increases. This is why the CPI is often described to represent an “adjustable” basket of commonly purchased goods.
The most common adjustments include:
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