The U.S. Dollar is likely losing more value than commonly reported.

 

March 12, 2019

Whether it’s housing costs, transportation, entertainment, or groceries – prices seem to be rising faster than the commonly reported inflation* rates provided by the U.S. government.  But, if the government numbers cannot be trusted, where can the truth be found?  For those willing to pay for the information, the web-site ShadowStats.com provides an alternative view of prices and economic activity.   But there is also a free source of data to consider – and it is rooted in a well-known American burger.

Before analyzing the data, a quick primer on how to track changing prices; a common method of measuring the relative value, or purchasing power, of the dollar is to calculate the cost of a “basket of goods” over time.  For example, suppose in 1986 the monthly historical cost of housing, basic utilities, food, and transportation for a family was $1000.  Fast forward to 2018; a family now needs to spend $2300 for the same basket.  Indexes like the Consumer Price Index (CPI-U) help track these price changes.

Figure 1 – CPI Inflation Calculator, U.S. Bureau of Labor Statistics

Figure 1 – CPI Inflation Calculator, U.S. Bureau of Labor Statistics

The U.S. Bureau of Labor Statistics Consumer Price Index (CPI) Inflation Calculator (https://www.bls.gov/data/inflation_calculator.htm) indicates that prices have risen by 130% (2301/1000) from 1986 to 2018.  Actually, it tries to put a more positive spin on the matter; as shown in figure 1, we are told that $1000 in 1986 “has the same buying power as” $2301 in 2018.  But, this is just another way of saying that the $1000 from 1986 purchases 43% (1000/2301) of its basket of goods in 2018 – or that the dollar has lost 57% of its purchasing power.  As bad as this sounds, many people feel that the dollar has actually dropped more in value.  Rather than analyze the merits and any possible subterfuge in the current CPI calculation, let’s compare it to something else.

An Alternate View of rising prices

First published by the Economist magazine in 1986, the Big Mac Index was created as an informal way of measuring the relative purchasing power between various currencies.  Since it also tracks, over time, the average cost of a Big Mac in various countries, it can be used as non-governmental view of changing prices.  And while narrower in scope than a “basket of goods”, the price of a burger is actually dependent upon several inputs – including labor, transportation, real-estate, and food prices.  The fast food industry is also a competitive and fluid market, putting constant pressure on companies to keep prices low.  As shown in figure 2, the average price of a Big Mac in the United States has increased from $1.60 (in 1986) to $5.51 (in 2018).  This represents price inflation of 244%, about 1.9 times higher than the CPI calculator.  Note that the divergence in indexes starts to noticeably widen by the mid-2000s; this is a bit later compared to when ShadowStats says the CPI index becomes unreliable, but the subsequent trend and scope are similar.

Figure 2 – Cumulative Percentage Increase of the Big Mac and CPI-U Index.

Figure 2 – Cumulative Percentage Increase of the Big Mac and CPI-U Index.

Closing Thoughts

If McDonald’s is an accurate reflection of prices, the government is indeed under-reporting the decline of the U.S. dollar’s purchasing power.  According to the Big Mac, the dollar has lost 71% (not 57%) of its value in just 32 years.  And whether 71% or 57%, maybe it’s time for an alternative to the dollar.  I’ll leave you with one possible option.  In 1986, one ounce of gold (at $357 per ounce) could purchase 223 Big Macs; in July of 2018 (at $1220 an ounce), that same ounce could purchase 221 Big Macs – a difference of less than 1%.  How about that?

About the Author

Tyler Chessman is resident of Texas - who much prefers a Whataburger to a Big Mac.  He is the author of the not-so-bestseller Understanding the United States Debt – and also the creator of a new gold-backed currency – TxGold.  Learn more at https://Restore.Money.  

*Note that I’m using the term “inflation” as it is commonly used today i.e. rising prices.  Historically, inflation has been understood to be an increase in the money supply – with rising prices being the result of money inflation.

 
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Tyler Chessman