Starbucks Index

If someone were to ask us how much their currency is worth, we’d ask them how much it costs to buy a tall latte. Not necessarily because we’re thirsty, although anytime is a good time for a latte, but because the price of a tall latte is an excellent indicator of a currency’s strength against the U.S. dollar. At least, that’s the thinking behind the “Starbucks index,” which basically says that when lattes cost more in one country than they do in another, the first country’s currency is more valuable.

Of course, that’s assuming there’s the same level of demand for lattes in both countries. If in one country people drink lattes all day every day, and in another everyone despises them, then obvi they’re going to cost more in Country #1. That’s just basic supply and demand. But let’s assume everyone everywhere loves lattes equally. If a tall latte costs $5 here in the United States and $6 in Russia, we could say, “Wow, that’s more.” But if we also take into account the currency exchange rate between the American dollar and the Russian ruble, we might find that $6 in Russia actually feels more like $13 or $14 here. It’s this number that the Starbucks Index is looking at.

Is the Starbucks Index the same thing as the Latte Index? Kind of, except that the Starbucks Index is the brainchild of The Economist, and the Latte Index is handled by the Wall Street Journal. Same idea, though. Might make us think twice the next time we treat ourselves to a latte.