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.

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Meet the man forcing the Government to reveal its plans for Brexit

Grahame Pigney hopes to "peel away" the secrecy of negotiations. 

Not so long ago, the UK Government was blissfully unaware of Grahame Pigney, a British man living in semi-retirement, in France. But then came Brexit. 

Pigney, who had been campaigning for Britain to stay in the EU, was devastated. But after a few days, he picked himself up and started monitoring the news. He was alarmed to discover the Government thought it could trigger Article 50 without the express permission of Parliament. 

He wasn’t alone. Gina Miller, an investor, was equally incensed and decided to take the Government to court. Pigney (pictured below) set up a crowdfunding campaign to support the case, The People’s Challenge. So far, the campaign has raised more than £100,000. 

This week, the campaign scored its first major victory, when a judge overruled the Government’s attempts to keep its legal defence secret. The case itself will be held in October. 

At a time when the minister for Brexit, David Davis, can only say it means “leaving the EU”, the defence sheds some light on the Government’s thinking. 

For example, it is clear that despite suggestions that Article 50 will be triggered in early 2017, the Government could be easily persuaded to shift the date: 

"The appropriate point at which to issue the notification under Article 50 is a matter of high, if not the highest, policy; a polycentric decision based upon a multitude of domestic and foreign policy and political concerns for which the expertise of Ministers and their officials are particularly well suited an the Courts ill-suited.”

It is also, despite Theresa May’s trips to Scotland, not a power that the Government is willing to share. In response to Pigney’s argument that triggering Article 50 without parliamentary approval impinges on Scotland’s separate body of law, it stated bluntly: “The conduct of foreign relations is a matter expressly reserved such that the devolved legislatures have no competence over it.”

Although Pigney is one of the millions of expats left in jeopardy by Brexit, he tells The Staggers he is not worried about his family. 

Instead, he says it is a matter of principle, because Parliament should be sovereign: “I am not a quitter.” 

While Davis argues he cannot reveal any information about Brexit negotiations without jeopardising them, Pigney thinks the Brexiteers simply “haven’t got anything”. 

A former union negotiator, he understands why Davis doesn’t want to reveal the details, but finds the idea of not even discussing the final goals is baffling: “When I was a union member, we wouldn’t tell them how everything was going but you did agree what the targets were that you were going for.”

He said: “The significance of what happened is we were able to peel away a layer of Government secrecy. One of the things that has characterised this Government is they want to keep everything secret.”