Using Coca Cola to Gauge Inflation

Forget the Big Mac Index. There’s another gourmet version that makes inflation rates more digestible – the Coca Cola Index.

Premise, a big data startup based in San Francisco, sees Coca Cola as an “eerily accurate bellwether” of a country’s economy. The widely traded and consumed soft drink, after adjusting for packaging and volume, is a better indicator of exchange rate fluctuations than official data.

By using an army of trained local contributors to take daily observations of food and other staples, Premise turns these data points into forward-looking insights on inflation and industry trends in hard-to-find places. With these information, Premise aims to keep tabs on the impact of economic policy at a micro and macro level.

The startup has raised $15 million thus far, receiving backing from Google Ventures among other investors, and has recently attracted former Treasury Secretary Larry Summers to join its board of directors.

When the index was rolled out one year ago, Premise found that China sold Coke at nearly half the price of that in the U.S. and Brazil, in line with U.S. Treasury’s comments on a “significantly undervalued” renminbi. The Treasury also urged Chinese officials to disclose its market interventions more regularly.

As a result, transparency is increasingly sought-after, especially when China’s leaders are scrambling to appease investors amid a market rout. Economists have long cautioned about the extent to which official figures, such as unemployment rates and manufacturing activity, measures the strength of China’s economy.

Even Premier Li Keqiang described the numbers going into China’s gross domestic product as “man-made” and takes them with a grain of salt, diplomatic cables released by WikiLeaks show.

The Coca-Cola Index is just one of the indicators created by the San Francisco-based startup for investors and businesses that want faster, more transparent and immediate data on inflation. The Bloomberg terminal, one of Premise’s clients, shows that China’s consumer staples prices increased 2.4 percent mid September from 1.65 percent in the same month last year. Premise’s data is uploaded to the terminal every Monday and Friday.

That seems to fall in line with the latest consumer price index released by the National Bureau of Statistics of China last month. Increasing food prices, led by pork and fresh vegetables, have propped up China’s CPI to a one-year-high of 2 percent in August, according to the bureau. Compared to Premise, the bureau releases CPI on the second week of every month, and compiles prices of 63,000 goods purchased by urban and rural households.

“The malaise in domestic demand is real,” UBS Economists Harrison Hu and Tao Wang wrote in a Sept. 14 report, referring to the sharp decline in broader investment goods as well as daily and durable consumer goods in China. Together, these point to “persistent deflationary pressures and “call for more monetary accommodation,” said the economists who maintained their GDP growth forecast at 6.8 percent.

While China moves towards being a more consumption-driven economy, businesses will benefit from accurate barometers that help them price their goods and plan production. For now, the Coca-Cola Index may be able to give us a flavour of where the Chinese economy may be heading.