On Wednesday, the U.S. Federal Reserve raised interest rates 0.75 percentage points, to 3% to 3.25%. It also signaled that more interest rate increases were in the offing, raising its projections for increases this year, suggesting borrowing costs could be increased to 4.4% by the end of 2022.
The short end of it: Central bankers are hell-bent on dealing with inflation, even at the risk of a faltering economy.
“We’re focused on getting inflation back down to 2%,” Federal Reserve Chairman Jerome Powell said in a press conference Wednesday. “We can’t fail to do that.”
On a practical level for restaurants, the higher interest rates mean higher borrowing costs and that could influence decisions on acquisitions, expansion or remodels. This would affect smaller chains and independents more, as they don’t have other financing options like larger chains.
The bigger issue is the impact on the overall state of the economy. The Fed wants to slow consumer spending enough that price hikes slow and inflation gets back down to that targeted rate.
That’s already starting to happen, according to a quarterly foodservice report this week by Rabobank—which expects a formal recession to hit the U.S. next year.
Demand at U.S. restaurants has already been slowing. Transactions at U.S. restaurants fell 10% in June, for instance. “Continued pressure will remain a challenging factor for foodservice demand,” the report said.
Pent-up demand that had pulled up restaurant sales in recent months is starting to wane. Consumers no longer have the backstop of government stimulus payments to keep them spending money at restaurants. Higher prices are also giving them pause. Consumers will be more frugal. They may reduce impulse visits or opt for cheaper meals. They may even trade down.
But, as Rabobank noted, the economy won’t hit everybody evenly.
Higher-income households will likely continue to spend and thus chains that target such customers will have less of a problem in a more difficult sales environment.
Companies that target lower-income consumers, on the other hand, will have a harder time.
“It is the middle and lower incomes we anticipate that will cut back on demand, thereby creating a K-shape in foodservice demand for months to come,” the report said. It won’t be until the end of next year before the market “can shake off the noise of the last few years.”
By that point, however, the damage may be done. Much of the industry targeting middle and lower-income diners have diminished profits. A weaker sales environment could be a serious problem. We’ve already seen that earlier this month with the bankruptcy of Happy Joe’s Pizza and Ice Cream.