Temporary or not, inflation is rattling restaurants and broader economy
Published 12:00 am Wednesday, July 21, 2021
Only once in six years had Mark Maguire raised prices at his Dallas restaurant.
Then, some of his employees, no doubt noticing the banners touting $1,000 signing bonuses at other eateries, demanded higher wages. And his suppliers hiked the cost of chicken, beef and cooking oil.
Maguire’s costs rose so much so fast that he’s had to rewrite his menu prices twice since March. Whether additional increases will follow depends upon a complex interaction of food supplies, labor availability and a shape-shifting virus.
“It’d be foolish for me to believe we’ve seen the worst of it,” he said. “I don’t want to let my mind think about this becoming a long-term deal.”
Neither does the Federal Reserve or the Biden administration, which both claim the inflationary squall will pass before it unhinges the recovery. On Monday, President Joe Biden called rising prices temporary and said his plans for massive infrastructure spending would drive prices down in the long run.
Consumer confidence readings, however, are sagging, and the unpredictable landscape confronting Maguire helps explain why some employers lack Washington’s confidence.
White House economists liken today’s fast-rising prices to a temporary bout of inflation after World War II. But Fed officials concede that they already have been surprised by the recovery’s initial chapters and that more surprises may loom.
“It’s a once-in-a-century experience with a different economy than it was a century ago,” said Diane Swonk, chief economist with the firm Grant Thornton. “There’s just no road map.”
Last week’s Labor Department report that consumer prices rose 5.4% in June, their fastest pace in 13 years, reignited a debate about whether officials have overstimulated the economy.
Congress during the past 16 months has spent more than $5 trillion to support growth, while the Fed has kept interest rates near zero and purchased more than $4 trillion in bonds.
The Fed said it will tolerate, for an unspecified period, inflation running “moderately” above its long-term 2% goal. But critics such as former Treasury Secretary Larry Summers warn of an inflationary spiral resembling the decade-long rise that began in the late 1960s.
Fed Chairman Jerome Powell said last week that the current pace of price increases is excessive, while reiterating that they will subside as the economy works out its reopening kinks.
Speaking at the White House on Monday, the president said “no serious economist” believes that “unchecked inflation” is likely. He blamed the rising cost of living on the strains of economic reopening.
“You can’t flip the global economic light back on and not expect this to happen,” Biden said.
Normally, the Fed would raise interest rates to cool off rising prices. But with employment still more than 10 million jobs below its pre-pandemic trend, and with profound uncertainty about the pace of rehiring, the environment is anything but normal.
“The challenge we’re confronting is how to react to this inflation, which is larger than we had expected or anybody had expected,” Powell said last week. “To the extent that it is temporary, it wouldn’t be appropriate to react to it.”
If the Fed is correct, inflation will slow as production bottlenecks ease and government stimulus wears off. But if the price increases trigger a vicious cycle of accelerating wage gains, the central bank could be forced to raise interest rates abruptly, potentially plunging the nation into a new recession.
The pandemic is clearly responsible for some unusual price surges, such as for hotel rooms and airfares. Used-car and truck prices also jumped by 10.5% in June, the largest one-month rise since the government started keeping track in 1953, according to the Bureau of Labor Statistics.
That sharp increase stems from a shortage of semiconductors that have interrupted production of new cars and prompted some buyers to consider used models instead. At the same time, rental-car companies that reacted to last year’s pandemic shutdowns by selling their fleets are now scrambling to restock by buying used cars at auctions, further boosting demand.
But those factors will not last. Automakers’ production “should be much stronger throughout the second half of the year,” increasing dealers’ inventories of new cars and easing sticker shock, JPMorgan Chase economist Dan Silver wrote in a research note Friday.
“Consumer prices for used vehicles could start to head lower soon,” he said.
Indeed, wholesale used-car prices, which generally anticipate prices on dealers’ lots by a couple of months, fell in June by 1.3%, according to the widely watched Manheim index.
In other sectors, such as health care and shelter, price increases may prove more sustained, economists said.
Maguire is trying to solve the same puzzle Powell is confronting. Like the Fed, the restaurant owner sees reason to believe inflation will cool. The cost of a 20-pound box of chicken breasts, which soared in 90 days from $42 to $113, already has eased to $92, he said.
But the big question is whether Maguire can get and keep enough workers to serve all the customers that have been flocking to his flagship, Maguire’s Kitchen & Catering, since Texas lifted its coronavirus restrictions in March.