25% Food And Dining Inflation Indicates Recession

Food prices, both "at home" (think grocery stores) and "away from home" (think restaurants), are up 25% during the Covid period from January 2020. This high cost change of a consumer necessity is cause for recessionary actions.

Reuters just published this timely article that explains the food inflation's reality effects: "Fast-food companies seeing low-income diners pare orders" (March 27 - Underlining is mine).

"Runaway prices at U.S. fast-food joints and restaurants have made people skittish down the income ladder and executives at chains including McDonald's MCD and Wendy’s recently said they worry about losing business from those on the tightest budgets.

"Roughly a quarter of low-income consumers, defined as those making less than $50,000 a year, said they were eating less fast food and about half said they were making fewer trips to fast-casual and full-service dining establishments, according to polling in February by Revenue Management Solutions, a consulting firm."

While consumer spending on food continues to be about 14% of the total spending in the CPI, the portion spent on eating out has dropped from 45% to 40% of food spending. Therein lies the recession indicator (as has happened in past inflationary periods).

While the Reuters article deals with lower-income consumers, the effect of a 25% increase in food and restaurant prices is widespread. Similar to $10.00 meals now costing $12.50, $100 meals are now up to $125. That sizable drop in restaurant spending shows the effect goes beyond low-income diners.

Restaurants other major cost: Labor

Employee shortages and overall inflation have also pushed labor costs up 25%. This graph shows the 25% rises for the three measures:

The bottom line - Inflation boosts recession probability

Focusing on top line numbers like GDP misses the uneven and adverse effects of inflation. Much of today’s business and investment commentary focuses on the Fed lowering the interest rate to make times bright again. However, negative undercurrents are building that will upend those rosy hopes.

Look beyond the $trillion companies and the $billionaires' successes. The numbers that mean more now are the adversely affected population statistics. From the Reuters' article (underlining is mine):

"In the Fed’s most recent Beige Book compendium of anecdotal reports gathered from business and community contacts around the country, 7 of 12 regional Fed districts reported low-income consumers were changing spending habits in search of bargains, seeking more help from community groups, or struggling to access credit.

"About one-third of Black American households, and 21% of white American households, earned less than $35,000 in 2022, according to the latest available U.S. census data."

History offers the lessons being relearned today. As the 1966 to 1982 inflation period rolled out, it kept revealing more adverse effects. The problem is, when a country's currency is in decline, "everyone" (no matter their occupation, rank, income, or wealth) reacts - both to protect themselves and to take advantage of "anomalies" (AKA others' hard luck).

Want to see this thinking in action now? Here is what the low-end restaurant execs are saying (from the Reuters' article - underlining and bold are mine):

"For fast-food companies that often promote an image of affordability, low-income consumers are a significant portion of the customer base and a bellwether for longer-term trends. But they are typically the first to cut back spending and the last to come back.

"But now, chains may be less likely to chase customers as hard as they have in the past because even with a drop in traffic, sales have remained consistent supported by increased prices.

"Fast-food companies aren't 'in a hurry to take traffic over profit the way they were a decade ago,' said Mike Lukianoff, CEO of SignalFlare.ai and a veteran consultant in the fast-food industry."

Will this "new" strategy of putting profits ahead of customer count and product sales succeed? No. This is a typical, unrealistic stopgap measure when things go awry. Note the profit-first payoff areas: Stock price and stock options. As happened before, this strategy will collapse as soon as the first competitors drop prices to capture customer market share.