Headline CPI Ticks Up & Restaurant CPI Continues Lower

Consumer pushback continues to erode restaurant pricing power

October Restaurant CPI continued its trend lower at 3.8% versus 3.9% in September, with Limited Service dropping below 4% to 3.8%, the lowest level since May 2020. Food at Home also dropped back down to 1.1% after successive ticks up since August. Despite the slight tick up in headline CPI, the consensus probability of another 25pt Fed Funds rate cut in December rose to 80% (from 60% before the report).

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Borrowing Costs Defy Fed Rate Cuts

Despite the Fed’s rate cuts, consumer borrowing costs are not following suit. 30 year Mortgages have moved higher in November indicating that despite Fed rate cuts, the bond markets anticipate higher borrowing costs over the longer term. This is largely driven by expected changes in policy from the incoming administration, factoring expected growth but also increased deficits and higher inflation from tariffs and labor pool pressure. The promised immigration crackdown is likely to hit the food industry disproportionately to others as workers for food supply chain & restaurant workers become more scarce.

Restaurant Consumers Have Been Revolting Against Prices for Years

In late 2022 a number of large chain restaurant companies announced ‘very low price elasticity’, signaling more steep price increases ahead. In my newsletter at the time I wrote of my skepticism, not that the elasticity algorithms were incorrect — but that they were not forward-looking enough. When you’re in the thick of pricing decisions for decades you become keenly aware of the difference between lagging and leading indicators. Most price elasticity algorthims are lagging indicators of price resistance, and based on what I was seeing in the data I was certain they were too focused on the lag. The interesting thing about consumers in restaurants is that they show us when they have reached their limit by changing the composition of their order before they start cutting back on visits altogether. By paying close attention to how consumer change their purchase behavior you can predict the inflection points that will lead to customer traffic loss & initiate proactive steps before it becomes a problem.

Looking back at the cumulative price increases in Food Away From home as reported by CPI and comparing that to growth in average purchases per transaction (check average), we see that prices have increase by almost 4pts more than average restaurant check. While the two are highly correlated (of course), average spend started tracking significantly lower than price increases starting in 2023 – indicating significant basket management. Basket management is a leading indicator of decreased customer visits, which has been in decline for over 2 years but was largely masked by price increases that bouyed same-store sales comps across the industry. Now that price increases are being met with consumer resistance, inherent weakness is more evident.

Customer Traffic Loss is Now Broad-Based

Demographic trends, specifically income levels of restaurant customers, indicate a significant backlash from the lowest income groups in 2023 - as was widely reported by many chain restaurants. However, as we got deeper into 2024 we have seen contagion into higher income groups showing that the customer counts from the 75k+ income groups dropped at a faster rate than lower income groups (who dropped out of restaurant visits in droves in 2023).

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