Starbucks Index

What Is the Starbucks Index?

The term Starbucks Index refers to a measure of purchasing power parity (PPP) that compares the cost of a tall latte in local currency against the U.S. dollar in 16 countries. Its purpose is to show the purchasing power of each national currency represented, which is reflected in the cost of a latte in that country in U.S. dollars.

For instance, a latte that costs significantly less in one country suggests an undervalued currency. The index was created by The Economist in 2004. There are other similar indexes, including the Wall Street Journal's Latte Index and the Big Mac Index, which was also started by The Economist. Online publication Finder also has a Starbucks Index.

How the Starbucks Index Works

Purchasing power parity is a popular macroeconomic analysis metric used to compare economic productivity and standards of living between countries. It compares different currencies through a basket of goods approach. It implies that two currencies are in equilibrium, known as the currencies being at par, when a basket of goods is priced the same in both countries and taking the exchange rates between the two currencies into account.

Purchase power parity lets you compare pricing between countries with differing currencies, although it's not a perfect measurement metric.

As stated above, the index was first created by The Economist, a global publication printed every week. Like every other major publication, it also has an online presence. It was based on its Big Mac Index, which was described as “a lighthearted guide to whether currencies are at their 'correct' level."

The Starbucks Index provides insight into what currency exchange rates should be based on the price of a tall latte. The Starbucks Index does this by comparing the price in 16 different countries in U.S. dollars. The theory suggests that a tall latte in one country should cost the same in another country once the exchange rate is applied.

This means that two currencies are at par when lattes have the same value in both countries. A currency is considered overvalued if the cost of a latte is more than the price paid by a U.S. consumer in U.S. dollars and undervalued if it costs less. Let's say a tall latte in the U.S. costs $3.50, $4.00 in China, and $1.50 in Thailand. Using this theory, the Chinese renminbi is overvalued compared to the U.S. dollar while the Thai baht is deemed undervalued.

Special Considerations

Applying this comparison as a viable measure is often deemed to be challenging. That's because it's very simplistic in its approach, as it doesn't take certain factors into account when comparing currencies. These factors include differences in product quality, consumer attitudes, and economic conditions in each country.

The Starbucks Index vs. Other Latte Indexes

There are other, similar indexes that have used the price of a tall Starbucks latte to measure PPP. The Wall Street Journal compared prices in U.S. dollars in more than a dozen major cities across the world with its own latte index based on prices at Starbucks locations. Online publication Finder also has its own Starbucks Index, which calculates latte prices in U.S. dollars in 76 different countries. The last time it published its findings were in 2019.

The Starbucks Index vs. The Big Mac Index

The Starbucks Index is closely related to The Economist's Big Mac Index or the Big Mac PPP. It is used to measure the purchasing power parity between nations using the price of a McDonald's Big Mac as the benchmark.

The Big Mac Index works the same way as the publication's latte index, replacing the basket of goods with the Big Mac. It suggests that exchange rate changes between currencies should affect the price consumers pay for a Big Mac in a particular nation.

Something the index fails to take into consideration is that while the inputs of the Big Mac and the way it is manufactured and distributed is uniform across all countries, there may be differences in the following:

These factors may sway the price of the Big Mac and throw off the ratio relative to the cost of the U.S. version.