🍔 Burger-flation

Hey hey, happy Monday!

The Fed cut rates on Wednesday, and lower rates could change how you think about your wallet and your portfolio. I wrote a post on this in July.

Today, I want to focus on rate cuts as a signal that our long national inflation nightmare is over.

Prices may not fall anytime soon, but the economy is becoming more affordable. And I’ll prove it to you with America’s favorite fast food order.

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The Fed cut its policy rate for the first time since the early days of COVID.

A lot of our economic gripes could slowly improve in this new era of lower rates. Mortgage, auto and other loan rates are already coming down, and a bunch of y’all think the stock market clearly looks better than it did just a few days ago.

The pre-COVID normal feels just within reach.

Except for those high prices.

I have bad news: your daily life may never be cheaper than it is right now.

But it’s becoming more affordable.

And I’ll prove it to you with America’s favorite fast food order: the Big Mac.

The Big Mac is a bastion of American culture.

It’s the crown jewel of one of the most successful fast food chains ever—McDonald’s—and its double patty, three bun, special sauce extravagance represents everything that is both delicious and unholy about the American palate.

If you need a reminder, Mickey D’s has you covered with this groundbreaking 50-year-old rap:

Big Macs have been around since 1968, so you, your parents, and your grandparents have likely had at least one memorable experience enjoying those burgers. Some of us eat them regularly, while others indulge only after a bad breakup or at 2 a.m. in a drunken stupor (I’ve done the latter a few times).

Regardless, we all know and love a Big Mac.

Especially Wall Street. The Economist has tracked the price of Big Mac for almost 30 years to measure purchasing power parity –  the gap between productivity and living standards between countries. Economics, but with burgers. Burger-nomics.

In the U.S., the price of a Big Mac has climbed 18% since January 2020, about in line with the 21% climb we’ve seen in the Consumer Price Index.

Before COVID, you could buy a Big Mac for $4.82 – or a crisp, $5 bill with change to spare. Today, you’re paying $5.69, according to the Economist’s index.

That’s about the extent of the inflation complaints we hear these days: Five years ago, that burger—or iced latte, lipstick, haircut, airplane ticket—cost so much less than it does today. It’s that damn inflation again!

You’re right. That is technically inflation.

But inflation isn’t just prices. It’s how many Big Macs – or iced latte, lipstick, haircut, airplane tickets – you can afford.

Let’s look at the price of a Big Mac in the context of wages.

At the beginning of 2020, an average worker could afford about five Big Macs with an hour’s pay. While the price of Big Mac gradually climbed, worker pay climbed as well. At one point in 2022, one hour of work could buy you 5.4 Big Macs – an improvement from just two years before. 

Inflation was a massive problem at that point, though. Prices – as measured by CPI – were increasing at a 8.4% clip, much faster than the 6.5% growth we were seeing in average hourly earnings. This is why the Fed started hiking rates – to bring price and wage growth back in line with each other. 

In the months ahead, Big Macs become slightly less affordable. The average Big Mac budget per hour of work slipped to 5.2. Our grocery budgets didn’t stretch as far as they once did. Inflation started to bite, and Americans noticed.

But the tide changed sometime early last year. Paychecks started catching up to prices.

In March 2023, the growth in wages officially overtook the pace of inflation. Since then, the average American’s hourly pay has increased 5.9%, while prices have jumped just 4.1%. Our burger-flation gauge has moved up ever so slightly over that time, from 5.2 to 5.3.

Burger-flation is not a precise science, and there are plenty of reasons why the Big Mac’s price has changed over time. Still, it’s a great example of how the economy is slowly healing from the inflation crisis through the lens of routine purchases.

Things gradually become more affordable even if they’re not necessarily cheaper. Suddenly, your spontaneous Big Mac cravings don’t break the bank like they used to. Maybe you get can fries with that.

Americans and businesses thrive best when pay grows faster than prices. We’ve seen it time and time again throughout history. Since 1965 (when worker pay data was first published), wage growth has exceeded inflation in about 60% of months.

Now, prices can drop during times of extreme economic stress. If Americans aren’t buying enough of something, a company may discount that item to stimulate demand. When unemployment surges and people have less money to spend, price drops become more frequent and noticeable. Wall Street calls this deflation, which has occurred about 5% of the time since price data began in 1948.

You don’t want deflation, though. You want affordability, not lost income and an empty wallet.

The only time we’ve seen prices fall consistently over the past three decades has been at the tail end of the Global Financial Crisis, when one in 10 working Americans was unemployed.

Nobody wants to rewind back to that chapter.

High prices sting. I still curse under my breath when I check out at the grocery store.

But burger-flation is a message of hope, not despair.

The US economy is moving forward, and you hold some power in this process. Corporate profits are growing again, and paychecks are increasing at an 4.1% rate.

If yours isn’t, maybe it’s time to ask your boss for a raise.

Or, you know, invest that hard-earned money in a hopes of a return that outpaces inflation.

Thanks for reading!

Callie

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