Scott Barnett & Associates Blog
Price Weary Consumers
and the Inflation Metrics Disconnect

April 30, 2024

Last week I saw a tweet of a photo of a promotion at Subway, "6 Inches 6 Bucks". The caption read: "Remember the $5 Footlong? Well, get ready for…"

It got me thinking. If Subway was selling a twelve inch sandwich for $5 in 2020, that equated to about 42 cents an inch. In 2024, we have a six inch sandwich selling for $6 and that's $1 an inch.
For the mathematically disinclined, that's 138% inflation over the four years.
This discussion is all about two things. First, what exactly is going on in menu price increases since 2020? Second, just exactly how reliable are the various measures of inflation used by our economic policy betters?
Assessing Menu Price Increases: Myth vs. Reality
There is a dirty little secret in the reporting of menu price increases- they're not real. They don't tell the truth. When a company reports on this, they typically talk about nominal increase versus "captured" price increase and there is usually a caveat (get out of jail free) that talks about mix change.

They may report an overall price increase and forget about the weighted increase. If they throw a menu change into this cocktail (and they usually do), the entire data set is worthless.

There are organizations that contend they can provide you with real information vis-à-vis price and resulting impact. Using complex algorithms, they theoretically calculate price elasticity, changes in menu preference and so on. I am still skeptical.

Here is reality. Restaurants have increased their menu prices by about 25-30% since 2020. They have also lumped in hidden price increases:

- When was the last time you went to a restaurant where bread was complimentary?
- Why is a cup of coffee selling for $3.95?
- What exactly is a "Miscellaneous Surcharge"?

These are hidden price increases.

I guess this means that restaurant people are just greedy robbers engorging themselves on ever-increasing profits, right?

No. Not at all.
The Perfect Menu-Price-Increasing Storm
In the pre-Covid years, restaurants were able to pass on commodity price increases to the customer in the form of higher prices. This was usually at 1-3% per year. There were also higher labor costs and these accelerated during the second half of the last decade. Our industry adapts quickly when necessary and heightened productivity became the rule of the day. But it will only take you so far.

Good restauranteurs always go to price last but they hit the wall during Covid. A perfect storm of supply chain breakdowns and resultant rising commodity costs, a shrinking labor pool and government interference started the prices moving up. The post-Covid surge in demand was an accelerant on an already blazing fire.

Which leads to the next issue. What about inflation and how do you handle it?
The Core PCE theoretically measures household consumption, but excludes gas and food.
The Fallible Consumer Behavior Metics
The financial media, academics and policy people view inflation through different lenses but it's the Federal Reserve whose opinion really counts. They use many inflation metrics but the one they like the best is something called the Personal Consumption Expenditure (PCE). It theoretically measures changes in the prices of things viewed as consumption by households, which makes up 2/3 of our economy.

Like all inflation measures, the PCE has been altered many times to reflect "accurate changes in people's behavior," which is another way of saying, "it's manipulated to a certain extent."

There is also something called the "Core PCE" which excludes gas and food. This is because, unlike the rest of the US, the Fed apparently doesn't eat or drive. For most of the country's people, those two things can be how they spend the great majority of their income.

Therein lies the crux of the issue.
Why do the vast majority of the country feel the economy is bad?
Because for them, it is bad.
In the Subway example, it's very bad when you get a smaller portion and it costs you more money. So, if you enlarge this to other segments like groceries, airfare, energy, proteins like chicken at about 35% higher; you have a very large group of very unhappy people.

Is this going to continue?

Like most, my crystal ball is hazy and there might even be cracks in it from all my other wrong predictions. But the way I see it, as long as gas stations and supermarkets are invisible to the policy people, they could easily continue to believe it's under control. If that happens, I will be looking for the $12 six inch promotion at Subway…
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