US restaurant menu prices jump with little sign of cooling

A historic surge in US restaurant menu prices is poised to continue, as demand for dining out has skyrocketed some three years after the first pandemic shutdowns.

Prices for "food away from home" — a category that includes all restaurants — rose 8.8% year over year in March, the largest annual jump since August 1981, according to the latest government data. That is outpacing the 5.0% rise in broader consumer prices. Meanwhile, business at bars and restaurants has jumped by 13.5% since March 2022 and by 36.2% over the last two years.

Prices at restaurants are now increasing at a faster pace than grocery stores for the first time since September 2021. The cost of dining out shows few signs of cooling even as the Federal Reserve's efforts to combat inflation through aggressive rate hikes continue and the threat of a recession is still brewing.

"Restaurants never lower prices," said Jake Bartlett, a senior analyst with Truist Securities.

Record prices

Within the food-away-from-home category of the consumer price index, full-service menu prices were up 8.0% year over year in March. Meanwhile, prices for limited-service meals and snacks jumped 7.9%, the largest one-year increase since February 2022.

Also within that index category, food at employee sites and schools skyrocketed 131.3% from March 2022 to March 2023, largely due to the expiration of free school lunch programs. This will keep the food-away-from-home index high until at least the fourth quarter of this year, said Bruce Grindy, chief economist of the National Restaurant Association.

Booming business

In March, US consumers spent $91.83 billion at food services and drinking places, up from $80.92 billion in March 2022 and $67.44 billion in March 2021, according to unadjusted seasonal US Census Bureau data. In 2022, sales totaled $975.92 billion, up from $843.61 billion in 2021 and $651.27 billion in 2020.

"Certainly we anticipated a revival, a resuscitation, of [restaurants] as more people felt it was safe to return to indoor public spaces; however, this is also occurring at the same time meal prices are rising and household expenses are rising across the board," said Andrew Novakovic, an agricultural economics professor at Cornell University.

Bookings at restaurants are now above pre-pandemic levels, with table reservations through the online reservation service Open Table up 3.3% in January from the same month in 2019.

The markets where restaurants have fared the best all have strong population and household income growth over the past few years and strong growth in retail rents, according to JLL's analysis. In addition, many of the best-performing cities were in warmer climates and had fewer COVID-19 restrictions.

Forever higher

Higher menu prices are almost certainly here to stay.

Restaurants are typically resistant to hiking prices, but when they do, the increase almost always remains permanent as consumers accept the higher costs, said Bartlett with Truist Securities. Grocery stores are far more tied to fluctuations in commodity markets, but restaurant prices only go up, even if food costs plummet or interest rates drop.

"Nothing the Fed does is going to make restaurants lower their prices," Bartlett said.

In addition to the rising costs of food, utilities and rent, the restaurant industry continues to struggle to hire and keep employees. Hourly pay for leisure and hospitality workers was up 6.1% from March 2022 to March 2023, compared to up 4.2% for all workers over that stretch.

The war in Ukraine and unseasonal weather worldwide have driven up grain prices, which has caused prices for eggs, meats and dairy to soar. Avian flu has also caused poultry and egg prices to skyrocket.

The prices are likely to remain relatively high and volatile for a while, Novakovic with Cornell said. Prices rise quicker than they fall, though as retailers become more confident that wholesale prices are trending down, retail prices will start to soften.

"Until then, I think retailers will be reluctant to move prices in a way that catches our attention," Novakovic said.