What McNuggets Tell The Fed About Inflation

If you want to understand why prices for many things aren’t rising as fast as they were a couple years ago, a good place to start would be the drive-thru. 

That’s according to one of the officials at the Federal Reserve who sets the nation’s monetary policy to keep inflation under control. In a speech Wednesday, Tom Barkin, president of the Federal Reserve Bank of Richmond, said the habits of McDonald’s customers showed why inflation continues to fall.

 “Consumers are driving this drop,” Barkin said in remarks at an economic conference in Wilmington, North Carolina. “Frustrated by high prices, they have become increasingly price conscious.”

The annual inflation rate measured by the Consumer Price Index tumbled to 2.5% in August from its recent high of 9.1% in June 2022. Consumer spending, however, has slowed but not faltered.

“They’re still spending, but they’re choosing: trading down from beef to chicken, from sit-down restaurants to fast casual, from brand names to private label,” Barkin said. “They’re waiting for promotions: opting for the $5 value meal at McDonald’s or jumping on discounts at Target.”

“This is how it is supposed to work. The old saying is that the solution to high prices is high prices. And that’s what we are finally seeing. Their choices are pressuring price-setters to finally moderate price increases.”

Fast food restaurants, including McDonald’s, introduced value meals earlier this year in an attempt to win back customers fed up with high prices. Those companies evidently observed the same trend that Fed researchers did earlier this year—diners were rebelling at higher prices at some restaurants and would draw the line at paying $20 for a hamburger. 

Don’t Expect A Victory Dance From The Fed

Still, Barkin said he wasn’t ready to declare “victory” in the Fed’s battle against inflation. The Fed began raising its benchmark interest rate in March 2022 to counteract a surge of inflation that took hold as the pandemic receded. 

The Fed ultimately raised the federal funds rate to its highest since 2001 and kept it there for more than a year with the goal of slowing the economy and discouraging borrowing and spending to bring supply and demand back into balance. 

Now that that’s happened, the Fed is shifting its focus toward ensuring the economy doesn’t slow so much that unemployment spikes. That’s why the Fed reduced its interest rate last month, the first cut in four years. 

Barkin said it was too soon to say “mission accomplished,” with inflation still above the Fed’s annual goal of a 2% growth and the labor market trajectory still in doubt.

“Victory means different things to different people, and—while we have made real progress—there remains significant uncertainty on both inflation and employment.”