The Big Mac index shows currencies are very cheap against the dollar

THE BIG MAC, the flagship burger of the McDonald’s fast-food chain, is a model of consistency. Composed of seven ingredients, the double-decker sandwich is produced in nearly identical fashion across more than 36,000 restaurants in over 100 countries. This consistency is the secret sauce in the Big Mac index, The Economist’s lighthearted guide to exchange rates. According to our latest batch of data, almost every currency is undervalued against the dollar. The result is that the greenback itself looks stronger, relative to fundamentals, than at any point in three decades.

The Big Mac index is based on the theory of purchasing-power parity (PPP), which states that currencies should adjust until the price of an identical basket of goods—or in this case, a Big Mac—costs the same everywhere. By this metric most exchange rates are well off the mark. In Russia, for example, a Big Mac costs 110 roubles ($1.65), compared with $5.58 in America. That suggests the rouble is undervalued by 70% against the greenback. In Switzerland McDonald’s customers have to fork out SFr6.50 ($6.62), which implies that the Swiss franc is overvalued by 19%.

According to the index most currencies are even more undervalued against the dollar than they were six months ago, when the greenback was already strong. In some places this has been driven by shifts in exchange rates. The dollar buys 35% more Argentinian pesos and 14% more Turkish liras than it did in July. In others changes in burger prices were mostly to blame. In Russia the local price of a Big Mac fell by 15%.

It is not unusual for emerging-market currencies to look weak in our index. But today the dollar towers over rich and poor alike. The pound, for example, looked reasonably priced five years ago. Today Americans visiting Britain will find that Big Macs are 27% cheaper than at home.

Such deviations from burger parity may persist in 2019. Exchange rates can depart from fundamentals owing to monetary policy or changes in investors’ appetite for risk. In 2018 higher interest rates and tax cuts made American assets more attractive, boosting the greenback’s value. That was bad news for emerging-market economies with dollar-denominated debts. Their currencies weakened as investors grew jittery. At the end of the year American yields began to fall as the global economy decelerated and investors anticipated a more doveish Federal Reserve. But the dollar has so far remained strong.

Although PPP is a poor predictor of exchange rates in the short-term, it stacks up better over long periods. An analysis of data going back to 1986 shows that currencies deemed undervalued by the Big Mac index tend to strengthen, on average, in the subsequent ten years (and vice versa). Something for investors to chew on.

Explore the Big Mac index with our interactive here.