Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Reshaping the Fast-Food Value Menu
Transcript
- Lucas: You know, Luna, I have been watching the fast-food value menu wars with a mix of fascination and personal hunger, because the economics behind them are actually telling us something about where the broader economy is right now. Luna: I feel like every time I drive past a McDonald's or a Taco Bell, the signs are screaming about a new five-dollar deal or a bundle. Is that just competition, or is there something deeper? Lucas: It's deeper. We're in a period where inflation is still running hot — CPI came in at 334 in May, up from 332.41. That's about 4.5 percent annualized. Meanwhile, the labor market is cooling. The June payrolls report showed just 57,000 new jobs, and the labor force participation rate fell to its lowest in fifty years, outside of the COVID era. Luna: So people are dropping out of the workforce, and those still working are seeing their wages get eaten by inflation. Average hourly earnings hit $37.60 in June, but that's barely keeping pace. Lucas: Exactly. That's the stagflation recipe — slow growth, high prices. And when consumers feel pinched, the first thing they cut is discretionary dining. But fast food is supposed to be recession-proof, right? The problem is that the definition of 'value' is shifting. Luna: I remember reading that in the 1970s, McDonald's introduced the Happy Meal and the Egg McMuffin as ways to offer perceived value without slashing prices outright. Are we seeing a similar strategy play out now? Lucas: We are, but with a modern twist. Instead of just lowering the price of a burger, chains are leaning into bundling and loyalty app offers. For example, Taco Bell's 'Cravings Value Menu' has items starting at one dollar, but they're smaller portions. The idea is to keep the price point low while protecting margins. Luna: Right, because if you just drop the price of a Big Mac from $5 to $4, you eat the cost. But if you bundle a small burger, fries, and a drink for $5, you're still getting a decent ring, and the customer feels like they're saving. Lucas: Exactly. And the ten-year breakeven inflation rate is at 2.24 percent, up slightly from 2.23. That tells you the market expects inflation to stay elevated. So chains are locking in these bundle strategies as a long-term play, not a temporary promotion. Luna: But what about the franchisees? I imagine their margins are getting squeezed between higher food costs and the pressure to offer these deals. Lucas: That's the dark side. A McDonald's franchisee might pay around 4 percent of gross sales in rent, plus a service fee. If the corporate office mandates a $5 meal deal, the franchisee has to absorb some of that cost. I've seen reports that some franchisees are pushing back, demanding more support from headquarters. Luna: And that's happening against a backdrop where the unemployment rate is still only 4.2 percent, so labor is tight. You have to pay more to staff the grill, but you can't raise prices too much or customers walk. Lucas: Yeah, that's the squeeze. And it's not just the big chains. Regional players like Whataburger and In-N-Out are also adjusting their value offerings. But there's another angle: the rise of private-label grocery brands. As grocery prices rise, some consumers are finding that cooking at home with store-brand ingredients is actually cheaper than fast food. Luna: That's a fascinating substitution effect. If a box of store-brand mac and cheese costs $1.50 and a fast-food meal costs $6, suddenly the value calculation shifts. Stagflation might actually be helping grocery stores' private labels gain market share. Lucas: And that's a real threat to fast food. The industry has always competed on convenience, but if the price gap narrows enough, people might reconsider. I saw a recent survey that said nearly 40 percent of consumers are eating fast food less often than a year ago, citing cost. Luna: So the value menu is a defensive move. It's not about growth — it's about holding onto the customers who are still willing to spend. Lucas: Right. And if today was actually useful to you, the way these shows stay ad-free is listener support. It's a simple thing — buy me a coffee dot com slash fexingo. Keeps us independent, keeps us digging into numbers like these. Luna: Yeah, we really appreciate those who chip in. It lets us spend the time to trace these connections, like how a $5 meal deal ties to the labor participation rate. Lucas: Exactly. So back to the fast-food wars — one thing I'm watching is whether the value menu becomes a permanent fixture or fades once inflation cools. If we look at Japan, they had deflation for decades, and the 100-yen menu became a permanent part of the landscape. Luna: That's a good parallel. But in the U.S., we've never had a prolonged deflationary period. Stagflation is more like the 1970s, and back then, value menus didn't really exist in the modern sense. They were more about portion control and new products. Lucas: True. And today's chains have another tool: data. Loyalty apps let them track exactly what you buy and offer personalized discounts. So instead of a blanket value menu, you might get a coupon for a free drink if you haven't visited in two weeks. That's micro-targeted value. Luna: Which also helps the chain avoid having to lower prices across the board. They can discount selectively for price-sensitive customers while charging full price to those who don't scan the app. Lucas: Right. And that's a huge structural change from the 1970s. Back then, a value menu was a printed board. Now it's an algorithm. The question is whether that algorithm can keep profits up when the economy is stagnating. Luna: I wonder if we'll see more consolidation. Smaller chains might not have the data infrastructure to compete, and they could get acquired or go under. Lucas: That's already happening. Private equity has been buying up regional fast-food chains and rolling them into larger platforms to gain scale. In a stagflation environment, scale matters because it gives you bargaining power with suppliers and more leverage with app developers. Luna: So the winners are the big guys with big data and big balance sheets. The losers are the independent operators and the mom and pop burger joints. Lucas: Exactly. And that's not just a fast-food story — it's a broader economic story. Stagflation tends to accelerate concentration in many industries because the weak get washed out. We saw it in airlines, we saw it in retail. Fast food might be next. Luna: But there is a counter-narrative. Some small chains are thriving by offering premium ingredients at a reasonable price, almost like fast-casual but without the $15 entree. They're positioning themselves as the affordable treat, not the daily habit. Lucas: Yeah, places like Shake Shack or Five Guys have a different value proposition. You go there less often, but you spend more per visit. That model might hold up better because it's not competing directly with the dollar menu. Luna: So the fast-food value menu is really a bellwether for consumer health. If the deals get better, it means chains are desperate for traffic. If they start pulling back, it means consumers have more spending power. Lucas: That's a great way to put it. And right now, based on the JOLTS data — job openings actually ticked up to 7.594 million in May — there's still some demand for labor, but it's not translating into big wage gains. So the consumer is still cautious. Luna: And that caution is showing up in the fast-food drive-through. The value menu is the canary in the coal mine. Lucas: Exactly. And as we move into the second half of 2026, I'll be watching how these menus evolve. If the labor market weakens further, expect even more aggressive bundling. If inflation finally moderates, we might see a return to simpler pricing. Luna: Either way, the era of the $1 item is probably gone for good. The new floor might be $3 or $4. And that changes the whole psychology of fast food. Lucas: It does. But as long as people need to eat, and as long as time is scarce, fast food will find a way to meet them where they are. The question is at what price.