While there are quite a few great commentators on inflation at EconLog, a recent lunch with a close friend of mine got me thinking deeply about how inflation has affected some of my favorite restaurants. It would be better for customers and the business itself to increase their prices in an inflationary environment.
During the meal, my friend noticed that the food prices had increased. Being economists, we were not shocked by this fact, for two reasons: A) the food we ate was good, as usual, and B) we understood that the increase in prices was due to a large part of the inflation that we have endured in the past. a few years.
From June 2020 to June 2024, annual CPI inflation rate was more than 5%. Producer Price Index, an index of prices paid to producers for inputs, increased from 2020 to 2022. Although the latter has slowed slightly, consumer demand to enter a restaurant has kept prices down as people return to their normal lives hungry for the activities they enjoyed before the pandemic. It would be naive to think that the prices of our favorite busy local restaurants will remain unchanged during this time.
In fact, I was I am happy to see that this restaurant has raised its prices. The reason is that businesses facing rising input prices and high demand face tough choices, especially if they can’t afford the blow to their margins to survive financially. They have two main options. First, they can increase the prices their customers pay. Wages – the number of workers – tend to rise in the inflation zone which allows customers to get a raise.
Second, they can cut quality. This uses the general term “shrinkflation.” Instead of giving you 4 pieces of meat in a sandwich, they can give you 2. They can add more water to their tomato sauce or stop serving lemon in your drink. See the Costco hot dog for example. Other ways to reduce quality can be less obvious, such as premature closure or saving (to stingier) diapers provided to customers.
I remember a few times being the last option at restaurants that I loved. Although the prices were exactly the same as many years before, the quality of their product had changed drastically for the worse. I have given up patronizing those restaurants in shame. The culprit, at least in part, was the inability or refusal to raise prices to cover the higher costs and use option 2 instead.
Although I had to shell out a few dollars to get it, my recent trip to the roast chicken and fries was unusual. I’m glad they chose option 1, and I hope it helps the restaurant last for many years.
Those who would say that high prices preserve quality is all well and good for someone like me, but not for those who need it the most, they should realize that reduced quality for the same price expensive food. Don Boudreaux made this point well in a post at Café Hayek in August 2021, where he predicted future and previous inflation “temporary” v. “persevere” a debate began.
Second, businesses that maintain fixed prices over time can struggle financially and downsize to the point where the customer base shrinks in a vicious cycle until the business has to close. Inflation makes local businesses more difficult to manage. It can be especially difficult for owners without formal business training.
Finally, businesses do not cause a general increase in the price level – inflation – government policies do it, especially by printing new money to finance government spending. Politicians are quick to blame others for inflation because admitting that inflation is caused by the policies they have been deliberately supporting and doing is tantamount to political suicide and must be avoided by a politician who is defending himself. Businesses that can – or can’t – raise response rates insulate themselves to some extent from political consequences.
Today’s political and digital environment can discourage businesses from raising prices due to high input costs or high demand. McDonald’s and other chains recently a fire broke out with prices that have grown higher than those customers expect from fast food outlets. They and others try to offer new menu options that deliver value and keep prices low. New ways of doing this are commendable and commendable in inflationary and difficult economic conditions. However, be careful Money Illusion; a lower level of the same price leaves you with a more expensive product. The cause of inflation, not entrepreneurs.
Giorgio Castiglia is the Manager of the Competitive Work Program at the Mercatus Center, and a PhD student in economics at George Mason University.
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