Big Mac alert!
HERE at HQ, the alarms that sound whenever the price of a Big Mac rises anywhere in the world have been clanging away this morning:
More inflation warnings on Wednesday in China, this time from a highly symbolic source. The price of a Big Mac has risen from Rmb14 to Rmb15 at the branch of McDonald’s around the corner from the FT’s Beijing bureau - part of an across-the-board price hike that the US fast food chain blamed on rising costs of ingredients - even if that is still less than two-thirds of the price of a Big Mac in the US.
Why has the price of a Big Mac gone up? Why, indeed, are many prices in China going up? You can see the main reason at right. According to our latest Big Mac index, the RMB is undervalued by 40%:
A weak currency, despite its appeal to exporters and politicians, is no free lunch. But it can provide a cheap one. In China, for example, a McDonald’s Big Mac costs just 14.5 yuan on average in Beijing and Shenzhen, the equivalent of $2.18 at market exchange rates. In America, in contrast, the same burger averages $3.71.
That makes China’s yuan one of the most undervalued currencies in the Big Mac index...The index is based on the idea of purchasing-power parity, which says that a currency’s price should reflect the amount of goods and services it can buy. Since 14.5 yuan can buy as much burger as $3.71, a yuan should be worth $0.26 on the foreign-exchange market. In fact, it costs just $0.15, suggesting that it is undervalued by about 40%.