Only once in six years had Mark Maguire raised prices at his North Dallas restaurant.
“It’d be foolish for me to believe we’ve seen the worst of it,” he said. “I don’t want to let my mind think about this becoming a long-term deal.”
Neither does the Federal Reserve or the Biden administration, which both insist the inflationary squall will pass before it unhinges the recovery. On Monday, President Biden called rising prices “temporary” and said his plans for infrastructure spending and pro-competition regulation would drive prices down in the long run.
Consumer confidence readings, however, are sagging, and the unpredictable landscape confronting Maguire, 57, helps explain why some employers lack Washington’s confidence.
White House economists liken today’s fast-rising prices to a temporary bout of inflation following the end of World War II. But Fed officials concede they already have been surprised by the recovery’s initial chapters and more surprises may loom.
“It’s a once-in-a-century experience with a different economy than it was a century ago,” said Diane Swonk, chief economist with the firm Grant Thornton. “There’s just no road map.”
Last week’s Labor Department report that consumer prices rose 5.4 percent in June, their fastest pace in 13 years, reignited a debate about whether officials have overstimulated the economy. Congress over the past 16 months has spent more than $5 trillion to support growth, while the Fed has kept interest rates near zero and purchased more than $4 trillion in bonds.
The Fed says it will tolerate, for an unspecified period, inflation running “moderately” above its long-term 2 percent goal. But critics such as former treasury secretary Larry Summers warn of an inflationary spiral resembling the decade-long rise that began in the late 1960s.
Fed Chair Jerome H. Powell acknowledged last week that the current pace of price increases is excessive, while reiterating they will subside as the economy works out its reopening kinks.
Speaking at the White House on Monday, the president said “no serious economist” believes “unchecked inflation” is likely. He blamed the rising cost of living on the strains of economic reopening.
“You can’t flip the global economic light back on and not expect this to happen,” Biden said.
Normally, the Fed would raise interest rates to cool rising prices. But with employment still more than 10 million jobs below its pre-pandemic trend, and with profound uncertainty about the pace of rehiring, the environment is anything but normal.
“The challenge we’re confronting is how to react to this inflation, which is larger than we had expected or anybody had expected,” Powell told the Senate Banking Committee last week. “To the extent that it is temporary, it wouldn’t be appropriate to react to it.”
If the Fed is correct, inflation will slow as production bottlenecks ease and government stimulus wears off. But if the price increases trigger a vicious cycle of accelerating wage gains, the central bank could be forced to raise interest rates abruptly, potentially plunging the nation into a new recession.
The pandemic is clearly responsible for some unusual price surges, such as for hotel rooms and airfares. Used-car and truck prices also jumped by 10.5 percent in June, the largest one-month rise since the government started keeping track in 1953, according to the Bureau of Labor Statistics (BLS).
That sharp increase stems from a shortage of semiconductors that has interrupted production of new cars and prompted some buyers to consider used models instead. At the same time, rental-car companies that reacted to last year’s pandemic shutdowns by selling their fleets are scrambling to restock by buying used cars at auctions, further boosting demand.
But those factors will not last. Automakers’ production “should be much stronger throughout the second half of the year,” increasing dealers’ inventories of new cars and easing sticker shock, JPMorgan Chase economist Dan Silver wrote in a research note Friday.
“Consumer prices for used vehicles could start to head lower soon,” he added.
Indeed, wholesale used-car prices, which generally anticipate prices on dealers’ lots by a couple of months, fell in June by 1.3 percent, according to the widely watched Manheim index.
In other sectors, such as health care and shelter, price increases may prove more sustained, economists said.
Maguire, who once launched restaurants for the Walt Disney World Co., is trying to solve the same puzzle Powell is confronting. Like the Fed chair, the restaurant owner sees reason to believe inflation will cool. The cost of a 20-pound box of chicken breasts, which soared in 90 days from $42 to $113, already has eased to $92, he said.
But the big question is whether Maguire can get and keep enough workers to serve all the customers who have been flocking to his flagship, Maguire’s Kitchen & Catering, since Texas lifted its coronavirus restrictions in March.
“Business is great,” Maguire said. “We’re seeing super strong demand. It’s so strong it’s become an issue. It’s hitting us on the labor side with wage pressure and availability.”
He has increased his average hourly wage about 30 percent since March, after a group of workers “came to me and said nobody wants to do this job and we need more money,” he said. “We were afraid we were going to start losing people to other restaurants.”
Cooks can earn $17 an hour, up from $12.50 before the pandemic. Hostesses who made $12 now pocket $15.
Yet Maguire can field only 40 workers, down from a full staff of 55, even as demand tops pre-pandemic levels. During especially busy periods, he’s had to close off up to a quarter of his dining room.
About three-quarters of restaurants surveyed in June said labor recruitment was their top problem, up from just 7 percent in January, according to Hudson Riehle, a senior vice president with the National Restaurant Association.
With labor representing about one-third of a typical restaurants’ costs, rising wages have helped drive menu prices to their fastest increases since 2009, he said.
Restaurant demand is likely to increase as more Americans return to work, especially with consumers sitting on an estimated $2.5 trillion in excess savings. The combination of a steady paycheck and less free time to devote to meal preparation often drives people to eat out, he said.
Michael Strain, a former Fed economist now with the American Enterprise Institute, said the restaurant industry could suffer more-persistent inflation than other sectors. The cost of meals away from home is up 4.1 percent over the past year, below the economy-wide figure, according to the BLS.
“You’re seeing significant price increases in restaurants,” he said, blaming factors including wage pressures.
Like anyone who lived through the 1970s, Maguire recalls the feeling of an economy that seemed to rest on quicksand. He remembers his father marveling at 20 percent mortgage rates and waiting in long lines for scarce supplies of gasoline.
A repeat of that era’s double-digit inflation is unlikely, according to most economists. For one thing, today’s economy is far less unionized, so automatic wage increases don’t ripple across industries the way they once did.
The White House earlier this month said the environment most resembles the inflationary spike that followed World War II. As the government lifted wartime price controls, Americans rushed to buy the automobiles and appliances they had been denied during years of sacrifice.
By July 1946, inflation reached an annual rate of more than 9 percent before peaking in March of the following year at nearly 20 percent. President Harry S. Truman called a special session of Congress in November 1947 to address mounting public concern about prices.
It took 2½ years for the postwar economy to settle down. But by December 1948, inflation had cooled to 3 percent.
Whether a similar cool-down will occur this time remains to be seen. Maguire — and many economists — are trying to assess crosscutting currents in the labor market.
Nationwide, the share of the working-age population actively working or looking for work is below 62 percent, almost two percentage points below the pre-pandemic figure.
Texas opted out of federal pandemic unemployment benefits on June 26, which Maguire hopes will ease his hiring troubles.
Hanging over everything is uncertainty over the pandemic’s trajectory, at a time when the delta variant of the coronavirus is galloping across the country. Just 51 percent of Texans 12 or older are fully vaccinated, compared with more than 56 percent nationwide, according to the state and the U.S. Centers for Disease Control and Prevention.
As the delta variant spreads, low-income workers who are less likely to be vaccinated could stay on the sidelines, Swonk said. Similarly, women might be unable to return to work if schools are slow to reopen and they lack alternative child care.
“That delta variant scares me,” Maguire said. “I hope it scares enough of the unvaccinated people into getting vaccinated.”
Continued wage pressure as workers remain scarce and demand stays strong means another increase in menu prices “is certainly possible,” Maguire said. But like the chairman of the Fed — and the president of the United States — he is counting on the economy getting back to normal by year end.