What egg prices and the restaurant sector can tell us about the economy and inflation

Earlier this week, I met up with my friend Sam, who owns seven delis in New York City...

In addition to groceries, a big part of his business is takeaway food prepared to order – such as an omelet or bacon, egg, and cheese on an English muffin.

When I asked Sam how his business is doing, he said he's being crushed by the soaring price of eggs, which has gone from $34 for a pallet of 25 dozen to $234 – $0.78 per egg! – in the past year. The below chart from a USA Today article earlier this week shows the price fluctuations nationally over the past two decades:

The price surge is driven by an outbreak of bird flu, which forced farmers to kill 17.2 million egg-laying hens in November and December. Prices will likely remain high until they can rebuild their stocks.

Some restaurants are adding an egg surcharge, as this Wall Street Journal article from yesterday noted: Dining Out Now Comes With a 50 Cent 'Egg Surcharge.' But as the article also noted, stretched consumers are resisting:

Ryan Crabbe's recent Waffle House breakfast order came with something unexpected: a 50-cent fee for each egg on his plate.

"It was pretty shocking to see that," said Crabbe, a 49-year-old construction project manager from Atlanta. "Definitely never seen anything like that before."

As egg prices have skyrocketed due to bird flu, some restaurants passing on the added cost by asking customers to pay per egg. Rather than hiking prices on their menus, which are costly to reprint, they are letting diners know upfront that each egg in an omelet, breakfast burrito and French toast comes with a fee. Restaurants are calling the egg surcharges temporary, hoping that will make them more palatable to diners.

And as the article continued:

It wasn't for Crabbe, who said his two over-easy eggs from Waffle House added $1 to his bill. His son's scrambled egg bowl pushed the total, including tax and tip, beyond the $20 he usually pays.

"$27 for an adult and a 12-year-old to eat at Waffle House is pretty alarming," the 49-year-old said. "It definitely starts to make you reconsider your choices in terms of eating out."

Sam said he's seeing this: After years of raising his prices, he's pushing the limits of what his customers can afford... so the increases in egg prices are going to eat into his already-slim margins.

Eggs are just one of many costs that are continuing to rise for restaurants (labor, etc.), which is forcing many to file for bankruptcy – as this WSJ article from October notes: Empty Tables and Rising Costs Push More Restaurants Into Bankruptcy. Excerpt:

Restaurant chains and operators this year are on track to declare the most bankruptcies in decades outside of 2020, when the global pandemic upended the industry's operations, according to an analysis of BankruptcyData.com records. The firm tracked chapter 11 filings of restaurants that are publicly traded, along with companies holding more than $10 million in liabilities.

Restaurants declaring bankruptcy this year include sit-down chains Red Lobster and Hawkers Asian Street Food, along with a string of fast-casual operations such as Tijuana Flats and Roti. More eateries on the edge are likely to file for bankruptcy in the coming year, according to restaurant executives, attorneys and lenders...

So are restaurants' struggles a leading indicator for a looming recession, and do soaring egg prices mean inflation is going to once again rear its ugly head?

No, and no...

While consumers aren't happy about rising prices, their spending (which accounts for nearly 70% of U.S. GDP) remains strong.

As such, our economy continues to grow steadily, recovering from the shock of the pandemic, as you can see in this chart from Trading Economics of year-over-year GDP growth for each quarter in the past five years:

Meanwhile, economists think there's only a 22% chance of a recession in the next 12 months – as you can see in this chart in Charlie Bilello's Week in Charts blog post last week:

As Bilello notes, that's the lowest probability since January 2022.

And inflation remains muted. Take a look at this next chart (also from Charlie Bilello – from his Week in Charts post this week) of the U.S. core personal consumption expenditures price index, which is the Federal Reserve's preferred inflation metric:

One of my favorite sayings is "the plural of anecdote is not data" – and I think that's the case here.

So yes, the soaring price of eggs generates lots of headlines, and many restaurants are struggling (and even closing). But our economy remains strong, and inflation is muted... which I expect to continue this year.

Best regards,

Whitney

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