Chipotle Menu Price Hike Spotlights Inflation Problem

Government programs, political campaigns and wishful thinking can’t trump economics. In the end, economics always wins.

Chipotle’s recently announced menu price hikes bear this out.

Chipotle was the darling of the “Fight for $15” crowd last month when it announced wage hikes for all its workers that will bring average pay to $15 an hour. “See! Companies can pay a living wage,” proponents of boosting the minimum wage exclaimed.

It took less than a month for economic reality to catch up.

This week, the restaurant company announced menu price hikes of about 4% to cover the higher wages. Now people are angry that they’re going to have to pay more for a burrito.

Nobody who understands the first thing about running a business is shocked by Chipotle’s price hike. When you increase the cost of production, at least some of that cost will inevitably get passed on to consumers. As the saying goes, there’s no such thing as a free lunch. And contrary to what a lot of people think, most companies aren’t sitting on endless piles of cash. Profit margins are extremely narrow – especially in the restaurant business.

Looking at the bigger picture, you should ask yourself whether forcing wages higher – particularly through government action – makes us better off in the long run. Sure, employees will enjoy better pay. But they will also have to pay more for everything they buy as increasing wages drive up the cost of production. You can try to wish this reality away, but economics will win.

The Inflation Problem

Chipotle offers us a glimpse at what’s going on in the broader economy.

Government policy in the wake of the COVID-19 pandemic has thrown the labor market completely out of whack. In a nutshell, trillions in newly printed money created a labor shortage. Businesses are competing with “enhanced” unemployment benefits that incentivize people to stay home and play video games. Why go to work when you can sit on the couch and collect a check? This has led to a bizarre scenario where unemployment is high even while there are a record number of job openings.

Chipotle’s wage increase was the only rational response to this nutty labor market. It needs employees, so it had to raise pay. A press release tells you exactly why the company made the move.

To accommodate its peak season and staff the estimated 200 restaurants it plans to open this year, Chipotle is looking to hire 20,000 new team members across the US.”

It was just as rational to raise menu prices to offset the labor cost. Chipotle CEO Brian Niccol summed it up in a statement at the Baird Global Consumer, Technology & Services Conference.

It made sense in this scenario to invest in our employees and get these restaurants staffed and make sure that we have the pipeline of people to support our growth. And then with that, we’ve taken some pricing to cover some of that investment.”

Don’t lose sight of the bigger picture here. A 4% pop in menu prices doubles the Fed’s mystical 2% inflation target. And this scenario is playing out across the economy.

This is precisely how inflation works. The Fed prints money. Government policymakers hand out money. The price of raw materials rises. The cost of labor rises. These costs get passed on to consumers. When it’s all said and done, the entire price structure is getting higher. Everything costs more.

This is the inflationary pressure the Fed insists is “transitory.”

Chipotle isn’t the only company facing rising labor costs.  As a Fox News report noted, “Companies from Target, Costco, McDonald’s to theme parks such as Disney World have taken similar steps to bump employee pay.”

And how do you think these companies will pay for these wage hikes? You can be certain the cost of everything from your Target t-shirt to your McDonald’s Mac is going to go up.

The Consumer Price Index (CPI) has increased 2.7% through the first five months of the year. At this rate, we’re looking at a 6.5% increase in consumer prices for 2021. But as Peter Schiff said in a tweet, “It’s more likely that price increases during the 2nd half of the year will exceed the 1st, as retailers finally concede reality and pass on higher costs to customers.”

Chipotle is the canary in the coal mine.

You can’t wish away economics. You can’t print trillions of dollars out of thin air without impacting prices – whether they be consumer or asset prices. You can’t pay people not to work and expect them to work. You can’t willy-nilly raise wages and other costs of production without a corresponding increase in consumer prices.

We can’t just pretend and play make-believe and hope the problem goes away. They tried that with the mortgage problem. Even though it was obvious that subprime was the tip of a huge iceberg, the Fed kept saying, ‘Don’t worry. It’s contained,’ because they were hoping that if they denied the problem, maybe it would go away. Well, they’re doing the same thing again with inflation. They’re telling all the people who are so worried about inflation, “Hey, don’t worry about it because it’s just transitory.” Well, it’s as transitory as subprime was contained.