EconLog has some excellent commentators on inflation, but a recent lunch out with a close friend got me thinking more deeply about inflation. inflation This is affecting some of my favorite local restaurants. In an inflationary environment, sometimes raising prices is better for both customers and the business.
During the meal, our friends noticed that the nominal price of the meal had gone up. As economists, we weren’t upset by this fact for two reasons: A) the food we were eating was delicious, as always, and B) we understood that the price increase was largely due to the inflation we’ve been enduring for the past few years.
From June 2020 to June 2024, Annual CPI Inflation Rate The producer price index is an index of the prices that producers pay for inputs. Surge in 2020 and 2022While the latter has dipped slightly, pent-up consumer demand for dining in restaurants has not allowed prices to fall as people return to normal life hungry for the activities they enjoyed pre-pandemic. It would be unreasonable to assume that prices at our favorite busy local eateries will remain constant during this time.
In fact, I happy It’s not surprising to see this restaurant raise prices. The reason is that businesses faced with rising raw material prices and growing demand have to make tough choices, especially if they can’t take a hit to their profit margins to stay economically viable. Businesses have two main options: First, they can raise the prices customers pay. In an inflationary environment, wages, the price of labor, tend to rise, allowing customers to absorb price increases.
Second, we can cut back on quality, which brings to mind the familiar term “shrinkflation.” We could cut down to two slices of meat on a sandwich instead of four. We could add more water to our tomato sauce or leave out the lemon in our drinks. Costco Hot Dog As an example, some ways of reducing quality may be less obvious, like closing early or skimping on the napkins you give to customers.
I can recall a few times where the latter option occurred at restaurants I used to frequent, where the prices were exactly the same as they had been for years, but the quality of the items had dramatically deteriorated, and unfortunately, I stopped frequenting those restaurants, at least in part because they were unable or refusing to raise prices to cover the increased costs and instead went with option #2.
I had to pay a few extra dollars to get it, but it was delicious as always when I went in for roast chicken and fries recently. I’m grateful I chose option 1 and hope it helps keep the restaurant afloat.
Those who say that increasing the nominal price and maintaining the quality is good for people like me, but not for those who are most in need, would say that the same nominal price and lower quality are More expensive mealsDon Boudreau made this point well. Posted by Cafe Hayek In August 2021, he predicted inflation was on the horizon. “Temporary” and “Permanent” The discussion began.
Secondly, if prices remain fixed for a long period of time, businesses may struggle to operate, quality may decline, their customer base may shrink, and they may end up closing down. Inflation makes it difficult for local businesses to operate, especially for those without formal business training.
Finally, Companies do not cause A general increase in the price level, or inflation, is caused by government policies, particularly the printing of new money to finance government spending. Politicians are quick to blame others for rising inflation, because admitting that inflation results from policies that they themselves deliberately supported and implemented would be tantamount to political suicide, something that self-preserving politicians should avoid. Businesses that do not, or cannot, raise prices in response are somewhat protected from political repercussions.
Today’s political and digital environment may prevent companies from raising prices in response to rising input costs or increased demand. McDonald’s and other chains have recently Under attack Fast food restaurants are charging higher prices than customers expect. They and others are trying to offer new menu options that offer value but at lower prices. In an environment of inflation and other hardships, their innovative ways of doing this are commendable. However, The illusion of money; For the same price, you will only get a more expensive product with lower quality. The culprit is inflation, not the entrepreneur.
Giorgio Castiglia is program manager of the Competition Project at the Marketas Center and a doctoral student in economics at George Mason University.
