February 20, 2022
Weekly Market Outlook
By Keith Schneider and Donn Goodman
I vividly remember the first golden arches that landed in my hometown in the 1960’s. I recall my mother putting my brother and I in our Chrysler LeBaron and heading over to McDonalds.
I would always get a hamburger, french fries, and a coke.
These were special occasions and ones I remember with fond memories.
The year was 1967, and the price of that hamburger was 22 cents. A full meal was less than $1.
In fact, the McDonald’s ad campaign grabbed your attention with the promise that you could eat a full meal for less than a $1!
Today that same “skimpy” hamburger is approximately $2.50.
A year later (1968) McDonald’s rolled out a super edition of the hamburger called the Big Mac. It was a creation that was supposed to include twice the meat, and of course sold for twice the price (45 cents)
McDonald’s introduced the Big Mac because their rival Burger King had already introduced a bigger sandwich in Florida called the Whopper.
American’s appetite for size has never been the same.
After the great rise in food costs during the high inflation period between the late 1970’s and early 1980s, economists began to track food costs as a barometer of the economy and the rate of inflation.
In 1986 the magazine, The Economist, invented the Big Mac economic index, and it’s been watched carefully by economists ever since because it’s been a reliable indicator for the rising cost of food in the U.S. and around the world.
The steep increase of the price of the Big Mac can be seen below in the table reporting 2004 to 2022:
Of course, food costs have been a significant contributor to the rising cost of a Big Mac around the world. However, the far greater contributor recently has been labor costs, which include taxes paid to the government (Social Security), benefits, and in many states a steep increase in the minimum wage.
Here is what it costs around the world to purchase a Big Mac.
What is so interesting about the government’s effort to calculate consumer prices is the inclusion in the CPI of different food calculations including food at home, and food away. The reporting agency tries to keep a check on this number by releasing the monthly information without including food and energy costs (ex food & energy). This has been done to help mitigate the large swings that can occur from spikes in energy and food prices. This seems ridiculous given that the average American relies heavily on food and energy to live their lives. These numbers have been steadily increasing (without spikes) since last year.
As you are already aware, the January 2022 number came in “very hot” at 7.5% year over year, which is the highest number since 1981. For a more detailed breakdown of all the key elements factored in the CPI we provide the December 2021 breakdown (CPI was 7.0% year over year and food prices averaged a 6.3% rise):
In last week’s Market Outlook, we provided the chart below showing the rapidly rising cost of produce from California, mainly caused by the ongoing drought there.
Unless wage increases can keep pace with the rising costs of goods and services, the average American loses ground. Today that number is approximately -2.5% depending on where one lives.
All Americans are paying much more for their everyday food, gas, heating bill, health care, and other costs. Some places in the U.S. are finding food shortages and grocery store shelves empty.
This type of inflation becomes punitive and has been known to cause high dissatisfaction of the government by average citizens.
While we have provided some solutions to this problem in the past, it inevitably comes down to making more ($) from investments and minimizing places where rising costs can be hurtful.
One of the most interesting charts is the weekly Gold is positioned to explode to the upside and go to new highs, if it can hold recent breakout levels.
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