What Does a Hamburger Teach us about Inflation and World Economics?
In December of 2021 we discussed PNC’s Christmas Price Index© (link here) and showed how something most of us are familiar with helps explain a complex economic event. You may remember that the 2021 PNC CPI© reported a 5.7% increase, which is the highest increase since the 6.6% increase reported in 2013 when commodity prices spiked.
Now that Memorial Day is behind us and the Fourth of July is in front of us, let’s consider inflation by looking at hamburgers. From the perspective of consumers, the graphic Statista prepared using the data provided by the Bureau of Labor Statistics displays the year over year change in the price of components of a hamburger from April of 2021 to April of 2022.
Bacon and ground beef had the highest year over year increases at 17.7% and 14.8%, respectively, followed by lettuce at 12.7% and the roll at 10.1%. While the hamburger viewpoint provides a lighthearted look at inflation, the price of meat and bread and vegetables has increased. These are daily impacts consumers feel and those impacts are significant.
Now let’s turn to the restaurants that sell hamburgers.
Wingstop, the chicken chain, reported the price of its wings grew 27.5% in Q4 of 2021. Burger King removed the Whopper from its “Two for $5” menu. Little Caesar’s increased the price of its Hot-N-Ready pizza from $5.00 to $5.55. Chipotle increased menu prices by 4% in 2021.
From the restaurant’s perspective, price increases at the restaurant have not kept pace with increased supply costs (burger index above), labor costs, and increased transportation and warehousing expenses. This is stressing businesses operating in this service sector.
The April 2022 CPI told us that food at home increased 10.8% and food away from home increased 7.2%. This indicates we should be expecting further increases in food away from home in future months.
It should be expected that food in restaurants will continue to increase in cost as food service sector margins are not generous enough to absorb the level of cost increases being experienced today.
The burger can also give us insight into the world economic situation using the Economist’s burgernomics. Burgernomics looks at purchasing price parity (“PPP”) to consider the price of a Big Mac over time in a country and considers the price of the Big Mac in one company versus another. This looks at impacts of foreign exchange rates across countries to tell us what the Big Would cost in the US compared to other countries based on current exchange rates.
Given the impact of the Russia / Ukraine war on a variety of commodity products and on transportation, businesses are attempting to analyze the costs of goods they will need once attention transitions from the 2022 crop year to the 2023 crop year, both for commodity inputs such as fertilizer and the food commodities such as wheat, sunflowers, oil, corn, etc.
The Economist selected the Big Mac as an international money standard because the iconic hamburger is produced to a close recipe standard in more than 80 countries. The price of the Big Mac in the US has increased from $5.66 in 2021 to $5.81 in February 2022, which is a 3% increase.
Using the Big Mac index to compare the cost of a Big Mac in the US and Australia tells us that $1.00 US dollar will buy 17% of a Big Mac in America and 19% of a Big Mac in Australia. An American in Mexico, using the February 2022 exchange rate would pay $3.45 US dollars for the same burger that would cost $5.81 in the US. That means $1.00 US dollar buys 29% of a Big Mac in Mexico.
The Big Mac Index gives us insight into the annual price changes for food in many countries, and the currency exchange impact. An Australian or Mexican company would be able to charge more for its products going into the US when developing its pricing strategy.
As there are continued upheavals in the world economy and pressures to on-shore or near-shore goods sold in the US, businesses will be impacted by the complexity of international currency fluctuations, availability of labor and transportation, and the underlying commodity prices.
What does this mean?
The humble hamburger helps explain the issues that businesses, their lenders, their investors, and their professionals need to understand to maintain or improve financial performance of a business. Based on the April CPI, the differences between increased food at home costs versus increased food away from home costs tells us we should be expected to see further increases in food away from home. Consumers are seeing their purchasing power reduced due to inflation, which in turn pressures businesses to increase labor rates to retain needed employees. This further increases the cost to produce the products, which reduces financial performance and further drives the cycle of price increases.
When analyzing a financial statement today, it is critical to look at each line item and identify the current impact of inflationary pressures, which will allow the business to anticipate areas where further cost increases should be anticipated. This type of sensitivity and performance risk analysis is going to be a key tool businesses must use today.
Increasing interest rates are impacting fixed charge coverage ratios from the perspective of the denominator, and increased costs are impacting fixed charge coverage ratios at the numerator level.
ABL structures are being impacted by the need for further levels of working capital, which increases interest costs, and stresses availability.
These are challenging times, even for hamburgers!