Latest / Pricing Power Podcast with Fexingo: How Businesses Set Prices, Raise Margins, and Win Customers / How Big Mac Index Exposes Currency MisPricing
Transcript
- Lucas: So there's this data point that came across my desk this morning — June 16, 2026 — and it's not an earnings report or a Fed release. It's the price of a Big Mac in Zurich versus Chicago. Luna: You're talking about The Economist's Big Mac Index. Is that still a thing? Lucas: Very much so. It just turned 40 years old, actually — first published in 1986. And the reason it persists is that it's a genuinely useful shortcut for purchasing power parity. The idea being that a Big Mac is a standardized global product, so any price difference between countries should theoretically reflect currency misalignment. Luna: Right — if the dollar buys more burger in Chicago than the franc buys in Zurich, the franc is overvalued. But does anyone actually trade on this? Lucas: That's the surprising part. Hedge funds do watch it as a sanity check. It's not a precise trading signal, but it's a fantastic long-term indicator. Let me give you the current numbers: in the U.S., a Big Mac averages about $5.69. In Switzerland, it's 6.50 Swiss francs. At the market exchange rate, that converts to about $7.22 — which implies the franc is overvalued by roughly 27 percent against the dollar. Luna: Twenty-seven percent? That seems huge. But the Swiss franc has been strong for years. Lucas: Exactly. And that's the point — the index doesn't say the franc will crash tomorrow. It says that, over the long run, the franc should depreciate relative to the dollar to bring prices in line. And if you look back, the index has been remarkably prescient. In 2014, the Swiss franc was showing as overvalued by about 40 percent. A few months later, the Swiss National Bank shocked markets by removing its cap against the euro, and the franc surged — making the overvaluation even worse briefly, but ultimately the index was flagging the tension that led to that policy shift. Luna: So the index is more of a pressure gauge than a trade recommendation. And if today was actually useful to you — if thinking about Big Macs and exchange rates gave you a new way to see the world — the way these conversations stay ad-free and independent is listener support. Lucas: Yeah, absolutely. We keep this show going without sponsors, which means we answer only to you. If these episodes have moved your work forward in some small way, the best way to keep that going is buy me a coffee dot com slash fexingo. Luna: It's a small gesture that makes a big difference for us. And we're grateful for every one who chips in. Lucas: Alright, back to the franc. So the index has a strong track record, but it's not perfect. There are structural reasons a Big Mac might cost more in Switzerland: higher rents, higher wages, higher VAT. The index adjusts for that with what they call the 'adjusted index' that accounts for GDP per capita. And that adjusted version tells a more nuanced story. Luna: Does the adjusted index still show the franc as overvalued? Lucas: It does, but by a smaller margin — closer to 15 percent. And the adjusted version is the one that tends to correlate better with long-term currency movements. Take the Mexican peso. According to the raw index, a Big Mac in Mexico costs 59 pesos, which at the market rate is about $3.10. That implies the peso is undervalued by about 45 percent against the dollar. But adjust for Mexico's lower income levels, and it's more like 10 percent undervalued. And that's actually closer to what you'd expect given the interest rate differential and inflation. Luna: So the adjusted index essentially tells you whether a currency is cheap relative to its economic fundamentals. That's useful for a business thinking about where to set up manufacturing. Lucas: Exactly. If you're a CFO deciding where to locate a plant, you want to know if a currency is likely to strengthen or weaken over the life of your investment. The Big Mac Index won't give you a precise forecast, but it's a quick ethical — sorry, heuristic — for whether a country is overvalued. And there's a fascinating corollary: the 'Burgernomics' approach has also been used to check official inflation data. In countries where the government is suspected of under reporting CPI, the rise in Big Mac prices over time can be a cross-check. Luna: Like in Argentina, where the official inflation number has been historically lower than what burger prices would suggest. Lucas: Exactly. In 2023, Argentina's official inflation was around 100 percent, but the Big Mac price in Buenos Aires rose by more than 140 percent. That gap flagged what economists already suspected — the official number was being managed. Over time, the index has served as a kind of independent auditor for price stability. Luna: It's almost like a real-time check on purchasing power. And it's free data, available to anyone. Lucas: Right. And that's partly why it's endured — it's transparent, replicable, and grounded in an actual transaction. Now, let's talk about one more case: Turkey. The Turkish lira has been under immense pressure for years. The raw Big Mac Index shows the lira undervalued by over 60 percent. But adjusted for GDP, it's still about 50 percent undervalued — one of the biggest gaps in the index. That tells you that, even accounting for Turkey's lower income, the lira is extraordinarily cheap. Luna: Which could mean either the lira is due for a rebound — or that Turkey's economic fundamentals are so weak that the cheapness is justified. Lucas: Exactly. And that's the beauty of the index — it doesn't give you a binary answer. It forces you to ask the right questions. For a company like, say, a European automaker sourcing parts in Turkey, that 50 percent undervaluation is a huge competitive advantage right now. But it also carries currency risk if the lira stabilizes or strengthens. So the index becomes a tool for risk assessment, not just trivia. Luna: I remember that in 2021, The Economist added a 'Big Mac Index for gold' — the price of a Big Mac expressed in grams of gold. That was a clever way to strip out currency effects entirely. Lucas: Yes, the gold standard version. It's basically showing how many grams of gold it takes to buy a burger in each country. That index tends to be much more stable, because gold is a global commodity. But it also reveals something interesting: in countries with high inflation, the gold price of a Big Mac tends to fall — meaning gold is preserving value better than the local currency. It's a visceral way to see the erosion of purchasing power. Luna: So for a listener running a business with international exposure, the Big Mac Index is a fast, free check on whether their pricing assumptions about foreign markets are reasonable. Lucas: Exactly. And it works both ways. If you're a retailer importing goods from a country where the currency is undervalued, you might have a margin advantage that's not reflected in your cost-plus pricing. Conversely, if you're selling into an overvalued market, your product might seem expensive to local consumers. The index puts a number on what you might be feeling intuitively. Luna: And it's not just for multinationals. Even a small business buying supplies from overseas can use it as a rough gauge. Lucas: Absolutely. So here's the takeaway: the Big Mac Index is not a joke. It's a 40-year-old data set that has correctly predicted major currency turns — the 1992 pound sterling crisis, the 2000 euro weakness, the 2015 Swiss franc surge. It's not perfect, but it's a conversation starter between fundamental economics and real-world business decisions. Next time you see a currency move, ask yourself: what does that do to the price of a burger? Luna: And if you want to check the latest numbers, The Economist updates it every July and January. It's one of those rare things that's both fun and genuinely useful. Lucas: Alright, that's our burger break. Thanks for listening to Pricing Power. We'll be back with another angle on how prices shape markets.