‘Big Mac’ index illustrates price adjustment slow-up

The price of a Big Mac is on the way up in Ireland again and illustrates that the price adjustment between euro area countries has begun to slow down.

The Big Mac index is used by economists to illustrate real price differences and movements between countries in the eurozone.

From the beginning of the euro crisis, Big Mac prices moved in different directions and at a different pace in the various countries, as costs came down while countries tried to regain competitiveness. The price reduction of 30 cents in Ireland in 2011 brought the cost of a Big Mac to around €3.35. The size of the reduction was second only to Greece’s 58 cent reduction, to around €2.50 in this, the hardest-hit economy.

They were both in negative territory in 2012-2013 but this year, the price rebounded in Greece by about 45 cents, more than in the other euro countries, and there was also a slight increase of a cent or two in Ireland.

Price adjustment has stopped in Ireland, says Pia Huttl of the economics think-tank Bruegel, working from figures produced by the Economist.

They show that price adjustment has reversed in Greece while in Portugal, Spain and Italy, there was no downward pressure on prices, as Big Mac prices increased slightly throughout the past three years. Finland and France last year were the two most expensive countries in which to buy a Big Mac while in Germany it was average.

Ms Huttl also looked at inflation and found a similar picture. Inflation has been falling since late 2011, and been below 1% since last October, with core-inflation that included energy and unprocessed food, following suit. Irish and Cypriot core inflation rates are now on an upward trend, supporting the view that price adjustment has slowed in both countries. Irish core-inflation was second to that of Germany, according to Eurostat figures for April while Greece and Spain are still experiencing deflation.


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