Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Reshaping the Fast Food Industry
Transcript
- Lucas: You know, we talk a lot about big macroeconomic forces on this show — CPI, GDP, jobless claims — but sometimes the clearest window into stagflation is a two-dollar item on a menu board. Luna: Fast food? Lucas: Fast food. Specifically, the Dollar Menu — or what's left of it. And why chains that built their brands on low prices are suddenly scrambling to convince customers they're still affordable. Luna: Right, because the classic stagflation move for consumers is trade down. If you're feeling pinched by rent and gas, you skip the sit-down restaurant and hit the drive-thru. Lucas: Exactly. And we're seeing that in the data. But here's the twist: even fast food is getting expensive enough that people are starting to push back. McDonald's same-store sales in the US were flat last quarter — and that's after they leaned hard into what they call 'national value platforms.' Luna: Translation: the McDouble is no longer a dollar. Lucas: Not even close. The average check at McDonald's has gone up about 20 percent since 2021. And it's not just them. Wendy's, Burger King, Taco Bell — they've all raised prices. Partly because their own costs went up — beef, labor, packaging. But partly because they thought customers would absorb it. For a while, they did. Now, not so much. Luna: And that's where the stagflation angle really kicks in. Because real wage growth is still sluggish. Hourly earnings are up — $37.60 on average in June — but CPI is still running high enough that purchasing power is basically flat. Lucas: Right. So the consumer is squeezed. They want to trade down, but the lowest rung on the ladder has gotten more expensive. So what happens? We're seeing a bifurcation. On one side, you have the value wars — McDonald's brought back a limited-time $5 meal deal. Wendy's countered with a $5 biggie bag. But these are loss leaders. They're not sustainable. Luna: On the other side, you have chains trying to push customers up the menu — premium chicken sandwiches, limited-time offers, mobile app exclusives. It's like they're trying to have it both ways. Lucas: And the data suggests it's not working uniformly. Foot traffic at quick-service restaurants dipped about 2 percent year-over-year in the second quarter of 2026, according to industry data. But here's the interesting part: fast-casual — places like Chipotle, Sweetgreen — they're still growing. Chipotle's same-store sales were up around 5 percent last quarter. Luna: So the trade-down effect is real, but it's skipping the bottom rung. People are going from casual dining to fast-casual, not from fast-casual to McDonald's. They're saying, 'If I'm going to spend eight bucks on lunch anyway, I'd rather get a burrito bowl than a McDouble.' Lucas: That's exactly right. And that puts the traditional fast food chains in a tough spot. Their core customer is lower-income, more sensitive to price. When that customer starts visiting less — or trading down to grocery-store frozen meals — you see the volume drop. And volume is everything in that business. The margins are razor thin. Lucas: A bit. Wholesale prices actually declined 0.3 percent in June, mostly on lower gasoline. But food-at-home prices are still elevated. And labor costs aren't going down. The unemployment rate is 4.2 percent — low by historical standards — and restaurants are still competing for workers. Average hourly earnings in leisure and hospitality are up about 5 percent year-over-year. Lucas: So the fast food operator is caught between a customer who has less to spend and a cost structure that keeps rising. That's the stagflation squeeze in miniature. Luna: And yet, some chains are finding ways to adapt. Wendy's is testing smaller-format restaurants — digital-only kitchens with no dining room. Lower real estate costs, fewer staff. McDonald's is rolling out AI drive-thru ordering in hundreds of locations. They're trying to automate their way out of the labor margin problem. Lucas: That's a long-term play, though. In the short run, the immediate strategy seems to be: protect the value perception at all costs. Because if you lose that, you lose the brand. McDonald's has spent decades building trust around affordability. If that erodes, it's hard to get back. Luna: And there's a broader lesson here for investors, or for anyone watching the economy. When the lowest-cost consumer staple starts to wobble, it's a signal. The fast food industry is basically a bellwether for the health of the lower and middle class. Lucas: Absolutely. And right now, the signal is mixed. The labor market is still adding jobs — nonfarm payrolls hit nearly 159 million in June. But job openings are barely above 7.5 million. The pace is slowing. Real GDP growth annualized was 2.1 percent in Q1, which is not terrible. But the mix — high prices, slowing growth, flat real wages — that's the stagflation recipe. Luna: And fast food is where that recipe hits the plate. So to speak. Lucas: Speaking of which — I want to take a quick second here. This show is ad-free, which is pretty rare in the podcast world. And the only reason we can keep it that way is because of listeners who choose to support us directly. If you've been following along with these episodes and finding them useful, you can help us keep going. Luna: Yeah, it's a small gesture that makes a big difference. We're at buy me a coffee dot com slash fexingo. That's it. No tiers, no perks, no gimmicks. Just a way to say 'this matters.' Lucas: Exactly. And we really appreciate it. So — back to the menu board. What do you think happens next? Do the value wars escalate, or do chains start shrinking their footprint? Luna: I think we'll see both. More closures of underperforming locations — especially in malls and urban cores where foot traffic hasn't fully recovered. And more aggressive value messaging, even if the margins hurt. Because the alternative is losing a generation of customers who will just cook at home. Lucas: And that's the wildcard. The pandemic taught a lot of people to cook. If fast food prices keep climbing, some of that behavior becomes permanent. That's a structural shift, not a cyclical one. Luna: Right. And that's what makes stagflation so pernicious. It doesn't just squeeze margins — it changes habits. And habits are hard to reverse. Lucas: Alright, next episode we're going to look at another industry that's being quietly reshaped by this environment. Any guesses? Luna: I'll put my money on something you wouldn't expect. Hopefully not pet insurance again. Lucas: No, no more pet insurance. I promise. See you next time.