When Federal Reserve officials meet in two weeks to decide whether to raise interest rates, they will probably eat catered food at their Foggy Bottom headquarters. If they want to get some fresh air, though, they might consider heading to the nearest Shake Shack, where they could find both tasty burgers and insight that will make their decision smarter.
That’s because the latest forecasts from Shake Shack and several other restaurant chains suggest that a mainstay of economic thought — that higher wages for workers will quickly translate into higher prices for consumers — may not apply as strongly as traditional economic theory suggests.
Chain restaurants present a particularly useful window into the ways that an improving economy is, or isn’t, transforming into broad-based price inflation. And inflation is the core issue facing the Fed as it considers a rate increase to prevent the economy from overheating.
Why restaurants? Labor costs represent a larger portion of their total costs than in many other types of companies, and so any wage increases are more likely to flow through to higher prices for consumers. That sensitivity — combined with the ubiquity of the sector — makes it an interesting bellwether for the economy. And conveniently, because worker compensation and pricing are such crucial components of the companies’ financial performance, restaurant chain executives often talk about what they are seeing in conference calls with investors.
Shake Shack executives, for example, talked to Wall Street analysts on Nov. 5 of their plans for 2016. Labor costs are going up — in part because of local minimum wage increases, in part because of the company’s emphasis on attracting good, loyal workers. “Washington, D.C., at $12 an hour, we’re paying $11 an hour in Texas, well above minimum wage, and we’re going to continue to think about that,” said Randall Garutti, the company’s chief executive. “We haven’t decided on the dates, but we do know that we’ll be increasing our wages. We want to get the best team, we want to have the best people, driving sales and driving our restaurants.”
But the price increase the company envisions is small. “Our plan in early 2016 in January is to take just a small menu price increase, just 1 percent to 2 percent, which will not completely offset those increases in labor that we’ve been talking about,” said the chief financial officer Jeffrey Uttz at a Morgan Stanley retail conference on Nov. 17. (That does come after a 3 percent price increase this past January. Average the two years out, and Shake Shack is doing its part to keep consumer prices rising at roughly the 2 percent annual rate the Fed aims for.)
Other restaurant chains present a similar impression: Labor costs are going up, but it’s just one more thing to manage through, not an excuse to raise prices substantially. And it’s not just in the cheeseburger business.
“We have a lot of great franchisees out there that really don’t look for excuses,” said Jeffrey Lawrence, chief financial officer of Domino’s Pizza, in an earnings call in October. “They’re really focused on managing. And whether it’s food cost or labor line item, they’re going to manage through it. So we’re not overly concerned about wages at the moment.”
The same idea applies if you favor a high-end steak place instead. “On a wage rate, in certain parts of the country, we are seeing some pressures there,” said Thomas Pennison Jr., chief financial officer of Del Frisco’s, adding that the company was “adjusting our operations as best we can to counteract that.”
What kind of price increases does that translate to? “We’re under 1 percent right now year over year,” he said, though it’s above 2 percent in certain markets. “Most of our pricing that we’ve been doing right now is specific to markets where we’ve dealt with minimum wage or some of the labor impacts.”
What about fast-casual burritos? “Yeah, we don’t have any plans right now for any kind of national price increase to deal with wage pressure,” said Chipotle’s chief financial officer, John Hartung, though there may be some price increases in “isolated markets.”
Prefer some baby back ribs? With barbecue sauce? They should remain affordable. “Well, Tom’s talking about a 3 percent increase in wages, and we’re talking about a 2 percent price increase,” said Wyman Roberts, the chief executive of Chili’s restaurant chain, referring to the company’s C.F.O., Thomas Edwards Jr.
Others say they do intend to raise prices to keep up with wages — but just can’t do so yet. Panera Bread’s prices are up 2.1 percent over a year earlier. “This price increase is not quite enough to cover structural wage benefit and food inflation in the quarter, but going forward, our plan is to do just that,” said Ronald M. Shaich, the company’s chairman, in late October.
None of this means that inflation will remain calm forever. Food prices are stable right now, reflecting a global commodity glut. Other chains may do as Panera intends to, and try to raise prices to reflect higher worker pay gradually.
But there’s also this: The last seven years have featured flat wages in inflation-adjusted terms, combined with rising corporate profit margins, two phenomena that aren’t completely unrelated. The behavior we’re seeing out of major restaurant chains may just be a sign that this is reversing, and that worker compensation will gain at the expense of corporate profits. If that’s the case, worker pay has some room to run before consumer price inflation is a real problem.
A few earnings calls from just one sector of the economy certainly don’t prove that’s happening, but the possibility may be enough to justify that Janet Yellen and her colleagues get out for lunch once in a while.
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