What does a latte tell us about currencies? Very little, actually

Purchasing power parity is not the same as the Big Mac Index.

The Wall Street Journal sees what the Economist is having, and it likes it. The latter's Big Mac Index is famous for demonstrating the variation in prices for the same good around the world. Despite Big Macs being basically identical no matter where you are, the dollar price varies wildly, from $6.81 in Switzerland down to just $1.82 in India. It's so influential that it's widely thought that Argentina is exerting pressure on its branches of McDonalds to keep the price down so as to not provide evidence of the nation's tinkering with reported inflation.

So now the WSJ wants a piece of the action, and has created its Starbucks Latte Index. I mean, it doesn't call it that, but that's what they're thinking:

Click to embiggen.

But like the Economist, the WSJ draws the wrong inferences from the variation. They both have a habit of using the data to illustrate purchasing power parity, the idea that some currencies are under- or over-valued because a comparable basket of goods varies in price. So the WSJ's Ira Iosebashvili writes:

One way to determine how currencies stack up is purchasing-power parity, or PPP, which compares the amount of currency needed to buy the same item in different countries. A grande latte at Starbucks, for example, costs $4.30 in New York, but the equivalent of $9.83 using Norwegian krone in Oslo, and just $3.92 in Turkish lira in Istanbul.

Starbucks Lattes and Big Macs both have another unique feature, though, which renders them less useful for comparing the strength of a currency overall: they are both made up of highly fungible goods, produced in two of the most integrated supply chains in the world. McDonalds, for instance, doesn't need to buy artisanal wheat from an individual farm; it can just trade in "wheat" as a mass-produced, internationally-traded com oddity. The company has even invented a product to sell to take advantage of variations in the cost of pork, the McRib.

In fact, for Starbucks, that's even more true than it is for MacDonalds. While Maccy D's has made a big deal out of its promise to only use British beef in its British burgers, most of the countries Starbucks operates in in don't grow their own coffee. That has to be imported from South America or North Africa, and so a Starbucks in London will almost certainly be paying the same for its coffee as a branch in Oslo, despite the difference in retail price being over $6.

What the Starbucks and Big Mac indices actually show is the price of unskilled labour and retail space. Those are the parts of the companies' businesses which, no matter how hard they try, they can't erase national differences from. Operating in Oslo, land of high taxes, is always going to be expensive, no matter how strong or weak the krone is.

The Starbucks index even makes this clear, thanks to the fact that the WSJ has included three American cities. A latte in New York City costs more than one in Detroit, a difference that self-evidently can't be due to the currency variation.

But the really important news is that London is actually one of the cheapest cities in the world for a Starbucks latte. Still overpriced for what it is, though.

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Steve Garry
Show Hide image

The footie is back. Three weeks in and what have we learned so far?

Barcleys, boots and big names... the Prem is back.

Another season, another reason for making whoopee cushions and giving them to Spurs fans to cheer them up during the long winter afternoons ahead. What have we learned so far?

Big names are vital. Just ask the manager of the Man United shop. The arrival of Schneiderlin and Schweinsteiger has done wonders for the sale of repro tops and they’ve run out of letters. Benedict Cumberbatch, please join Carlisle United. They’re desperate for some extra income.

Beards are still in. The whole Prem is bristling with them, the skinniest, weediest player convinced he’s Andrea Pirlo. Even my young friend and neighbour Ed Miliband has grown a beard, according to his holiday snaps. Sign him.

Boots Not always had my best specs on, but here and abroad I detect a new form of bootee creeping in – slightly higher on the ankle, not heavy-plated as in the old days but very light, probably made from the bums of newborn babies.

Barclays Still driving me mad. Now it’s screaming from the perimeter boards that it’s “Championing the true Spirit of the Game”. What the hell does that mean? Thank God this is its last season as proud sponsor of the Prem.

Pitches Some groundsmen have clearly been on the weeds. How else can you explain the Stoke pitch suddenly having concentric circles, while Southampton and Portsmouth have acquired tartan stripes? Go easy on the mowers, chaps. Footballers find it hard enough to pass in straight lines.

Strips Have you seen the Everton third kit top? Like a cheap market-stall T-shirt, but the colour, my dears, the colour is gorgeous – it’s Thames green. Yes, the very same we painted our front door back in the Seventies. The whole street copied, then le toot middle classes everywhere.

Scott Spedding Which international team do you think he plays for? I switched on the telly to find it was rugby, heard his name and thought, goodo, must be Scotland, come on, Scotland. Turned out to be the England-France game. Hmm, must be a member of that famous Cumbrian family, the Speddings from Mirehouse, where Tennyson imagined King Arthur’s Excalibur coming out the lake. Blow me, Scott Spedding turns out to be a Frenchman. Though he only acquired French citizenship last year, having been born and bred in South Africa. What’s in a name, eh?

Footballers are just so last season. Wayne Rooney and Harry Kane can’t score. The really good ones won’t come here – all we get is the crocks, the elderly, the bench-warmers, yet still we look to them to be our saviour. Oh my God, let’s hope we sign Falcao, he’s a genius, will make all the difference, so prayed all the Man United fans. Hold on: Chelsea fans. I’ve forgotten now where he went. They seek him here, they seek him there, is he alive or on the stairs, who feckin’ cares?

John Stones of Everton – brilliant season so far, now he is a genius, the solution to all of Chelsea’s problems, the heir to John Terry, captain of England for decades. Once he gets out of short trousers and learns to tie his own laces . . .

Managers are the real interest. So refreshing to have three young British managers in the Prem – Alex Neil at Norwich (34), Eddie Howe at Bournemouth (37) and that old hand at Swansea, Garry Monk, (36). Young Master Howe looks like a ball boy. Or a tea boy.

Mourinho is, of course, the main attraction. He has given us the best start to any of his seasons on this planet. Can you ever take your eyes off him? That handsome hooded look, that sarcastic sneer, the imperious hand in the air – and in his hair – all those languages, he’s so clearly brilliant, and yet, like many clever people, often lacking in common sense. How could he come down so heavily on Eva Carneiro, his Chelsea doctor? Just because you’re losing? Yes, José has been the best fun so far – plus Chelsea’s poor start. God, please don’t let him fall out with Abramovich. José, we need you.

Hunter Davies is a journalist, broadcaster and profilic author perhaps best known for writing about the Beatles. He is an ardent Tottenham fan and writes a regular column on football for the New Statesman.

This article first appeared in the 27 August 2015 issue of the New Statesman, Isis and the new barbarism