Predicting Fed moves from menu prices

Chain restaurants present a particularly useful window into whether the economy is improving or not

When Federal Reserve officials meet in two weeks to decide whether to raise interest rates, they will probably eat catered food at their Foggy Bottom headquarters. If they want to get some fresh air, though, they might consider heading to the nearest Shake Shack, where they could find both tasty burgers and insight that will make their decision smarter.

That’s because the latest forecasts from Shake Shack and several other restaurant chains suggest that a mainstay of economic thought — that higher wages for workers will quickly translate into higher prices for consumers — may not apply as strongly as traditional economic theory suggests.

Chain restaurants present a particularly useful window into the ways that an improving economy is, or isn’t, transforming into broad-based price inflation. And inflation is the core issue facing the Fed as it considers a rate increase to prevent the economy from overheating.

Why restaurants? Labour costs represent a larger portion of their total costs than in many other types of companies, and so any wage increases are more likely to flow through to higher prices for consumers. That sensitivity — combined with the ubiquity of the sector — makes it an interesting bellwether for the economy. And conveniently, because worker compensation and pricing are such crucial components of the companies’ financial performance, restaurant chain executives often talk in conference calls