Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Reshaping the Fast Food Industry
Transcript
- Lucas: So I was looking at the latest CPI release from last month — May 2026 — and one number jumped out at me. The index for food away from home rose another 0.3 percent month over month. That's on top of a 4.1 percent year-over-year increase. Luna: And that's the category for restaurants, right? Fast food, sit-down, everything? Lucas: Exactly. And for fast food specifically, the increases have been even steeper in some chains. McDonald's average check is up something like 8 percent from two years ago. But here's the thing — same-store sales are still positive. They're just not growing as fast as prices are going up. Luna: So people are still going, but they're spending more and maybe getting less. That feels like a classic stagflation dynamic. Lucas: Right. And the chains are acutely aware that they're pushing up against a ceiling. You look at McDonald's recent earnings call — they explicitly said they're focused on 'affordability initiatives.' That's code for value menus and limited-time offers that bring the perceived price down, even if the per-unit margin is thinner. Luna: It's almost like a game of chicken. Raise prices too much and you lose the traffic. Don't raise them enough and your margins get crushed by higher labor and commodity costs. Lucas: And commodity costs are the wildcard. Beef prices have been volatile. Chicken is up. Cooking oil, cheese — it's all moving. The Bureau of Labor Statistics data shows wholesale food costs are up about 3 percent year over year. So restaurants are getting squeezed from both ends. Luna: Which is why we're seeing those smaller portion sizes. I noticed Taco Bell's 'Cravings Value Menu' has items that are genuinely cheaper, but the portions are noticeably smaller than what they replaced. Lucas: That's exactly the playbook. You maintain the price point — say $1.99 — but you shrink the serving. It's a stealth price increase. And because the nominal price hasn't changed, the consumer doesn't feel the sting as much. But the margin is preserved, or at least stabilized. Luna: Is that sustainable though? If real wages are barely keeping up — average hourly earnings were up 3.6 percent in May, but CPI is running around 3.5 percent — then real purchasing power is basically flat. Lucas: That's the constraint. You can only shrink the burrito so much before people notice. And the data from the JOLTS report shows job openings rebounded to 7.6 million in April, which is solid, but the unemployment rate is stuck at 4.3 percent. So there's still slack in the labor market. That means wage growth isn't accelerating enough to absorb higher menu prices. Luna: So the fast food industry is basically in a profit squeeze. Volume and margin are both under pressure. Lucas: And yet, the market is still rewarding the biggest players. McDonald's stock is down about 2 percent over the last five days, but that's inline with the S&P 500, which dropped 1.1 percent. The broader market is jittery — gold fell 5 percent, silver plunged 12 percent. But fast food is seen as defensive. People have to eat. Luna: Right. Even if they trade down from Chipotle to Taco Bell, they're still eating fast food. The category benefits from a kind of recession-proof demand. Lucas: Exactly. And that's the paradox of stagflation for fast food. The macro environment is hostile — high inflation, slow growth — but the business model is resilient. The key question is whether the operators can manage the cost inputs and the pricing psychology without breaking the consumer's trust. Luna: If walking through the economy with us has made something click for you today, we'd love it if you'd buy us a coffee. It's buy me a coffee dot com slash fexingo. That's what keeps the show ad-free and independent. Lucas: Absolutely. And it really does make a difference for us. So back to the fast food squeeze — one of the things I'm watching is how the limited-time offers evolve. McDonald's brought back the McRib earlier this year. That's a nostalgia play, but it's also a way to drive traffic without permanently lowering prices. Luna: And it worked. Same-store sales popped in the quarter they launched it. But that's a short-term fix. Lucas: Right. The long-term fix is either cost innovation — like automating more of the kitchen — or menu simplification. Some chains are reducing the number of items they offer to streamline supply chains. That reduces waste and labor complexity. Luna: So fewer choices, but hopefully better margins. I wonder how consumers will react if the value menu keeps shrinking. Lucas: That's the billion-dollar question. If real growth doesn't pick up — and the latest real GDP annualized was only 1.6 percent — then we're in this grind for a while. Fast food will adapt, but it won't be comfortable.