This week saw the latest Big Mac Index (BMI) from The Economist. The survey, launched in 1986, is described as ‘a way to make exchange-rate theory a bit more digestible ‘and is based on the theory of purchasing-power parity (PPP), in simple terms the idea that a dollar is a dollar wherever you happen to be. The Economist use the Big Mac as their traded good benchmark, a product that is produced to roughly the same specifications in 120 countries across the globe so comparing exchange rates with PPPs should be a good indication as to whether a currency is under or over-valued.
Whilst these results are hardly surprising, the Big Mac index has proved most useful for tracking the value of the euro since its launch in January 1999. Whilst most analysts predicted the rise of the euro against the dollar, the BMI rightly predicted that the euro was overvalued at launch and currently indicates that Sterling is currently 26% overvalued against the euro. Whether or not the BMI factors in the PMs ‘when the economic climate is right’ policy is yet to be seen but if it does it is a fairly safe bet that Britain won’t be adopting the euro any time soon.