Fast-Food Prices Are Up 55% Since 2018 — and Rising

Quick-service restaurant prices have climbed 55.4 percent since January 2018, outpacing everyday household purchases, which rose 34.8 percent over the same stretch. That gap is the story of America's fast-food counters — and the industry's most stubborn problem still isn't solved.

The numbers come from a report published this week by consumer-data firm Numerator. Beyond the long-run gap, the report found everyday prices rose 0.6 percent in October after a 0.7 percent rise in September. On an annual basis, they increased 2.7 percent, up from 2.1 percent in September.

Why are restaurant prices rising faster than groceries?

Labor is the driver, according to Joseph Balagtas, a professor of agricultural economics at Purdue University and director of its Center for Food Demand Analysis and Sustainability. He pointed to USDA data showing labor accounts for 59 percent of what consumers pay for food in restaurants, versus 47 percent for groceries.

"In restaurants we're paying for food ingredients and for people to prepare and serve the meal," Balagtas told Inc. "So as a tight labor market pushes wages up, it shows up more in restaurant prices than in groceries."

The pressure shows up on both sides of the counter. Chad Moutray, chief economist at the National Restaurant Association, told Inc. that labor costs are up 42 percent since the pandemic and that profit margins remain "exceptionally tight." Sales have held up, he said, but traffic growth has been challenging.

How much cost can chains actually pass on?

Balagtas said the squeeze isn't a simple case of rising costs versus chains charging whatever customers tolerate. "Both matter," he noted. Costs give restaurants a reason to raise prices; demand and competition decide how much of those costs they can pass along.

Here's the wrinkle that protects pricing power: most restaurants face the same pressures. A chain that raises prices is less likely to lose customers to a rival that doesn't, because the rival is raising them too.

That balance helps explain Moutray's observation that sales have held up even as traffic growth has lagged. Restaurants can keep passing costs through — but only as long as they don't shed too many customers along the way.

"Many restaurants feel they can't fully pass higher costs on to consumers who are already stretched financially," Moutray said.

Who gets hit hardest?

Food demand is famously resilient. Balagtas said people tend to keep buying food even when prices climb, especially when prices rise across the board. But he flagged an uneven burden: higher prices hit lower-income households hardest because they spend a larger share of their income on food.

Cutting back isn't as simple as skipping a trip to the drive-thru, either. "If you want to eat one less fast food meal a week, do you have the time and inclination to prepare an extra meal at home?" Balagtas asked. He added that chains can also work to keep customers coming through expanded value meals or other discounts.

What happens next?

Whether higher prices start driving customers away may come down to who is paying and what chains offer in return. With labor now nearly 60 cents of every restaurant food dollar and margins still tight, the industry's biggest problem — absorbing costs it can't fully pass on — remains unsolved even after six years of steep menu increases.

By Amara Osei for Business Bearings.