Rising Minimum Wages Meets Rising Restaurant Inflation

The Bureau of Labor Statistics announced that in November, the price of dining out increased three times more than the price of eating at home. As states and cities across the nation brace to raise minimum wages in the New Year, elected officials should be wary of the impacts on business climates at the state and local level.

BLS announced inflation of menu prices (called “food away from home”) has consistently increased by 0.4% each month for the last three months, and 5.3% overall in the last twelve months. Since last November, BLS finds full-service restaurant meal prices have risen 4.3%, and limited-service meal prices have risen 6.0%.

By comparison, grocery price inflation (called “food at home”) was half that of restaurant prices (0.2% in November), and declined from last month. Over the last twelve months, grocery prices have only increased by 1.7%.

In 2023 and heading into 2024, more states and localities are raising minimum wages. As activists push ever-higher minimum wage and tipped wage goal posts across the country, this trend reveals how restaurants are attempting to adapt.

Look at what’s currently unfolding in the District of Columbia. Voters approved a schedule to fully eliminate the city’s tip credit, which began with two wage hikes up to $8 per hour for all tipped restaurant employees in 2023.

Prior to the implementation of these increases, a survey of over 100 local restaurants found that in order to stay in business in the city, 92% of restaurant operators believed menu prices would increase in response to this policy change. What’s worse – nearly all (98%) believed this would reduce customer foot traffic to their restaurants.

Yet as restaurants typically operate on extremely minimal profit margins, tipped wage hikes like the ones recently implemented in Washington, D.C. require restaurants to adjust significantly. This most recent inflation data suggests many may be forced to outright raise prices on their loyal customers to stay in business. According to the Consumer Price Index for Urban Consumers in the Washington metropolitan area, prices for food away from home are rising several times faster than food at home or even overall inflation.

Consumer Price Index (CPI-U) Changes in Washington, D.C. Metropolitan Area
Monthly Inflation – Sep 2023 to Nov 2023 Year-over-year Inflation – Nov 2022 to Nov 2023
Overall inflation (“All items”) -0.27% 2.78%
Food at home 1.25% 1.04%
Food away from home -0.31% 5.72%

Source: Bureau of Labor Statistics Consumer Price Index for All Urban Consumers (CPI-U), Washington-Arlington-Alexandria, not seasonally adjusted. Note: Seasonal adjustments are not yet available for the Washington-Arlington-Alexandria metropolitan area. Monthly growth calculations are based on change from September 2023 to November 2023 as local data is released bi-monthly.

Yet basic laws of economics suggest that if prices get too high to go out to dinner in high-wage areas, customers may opt to stay home. This would be additionally devastating for many individually-owned local restaurants, which may not be able to adapt to rapid tip credit elimination, and force them to shut down.

In addition, significant economic research shows that rising wages contribute to inflation, and continuing on a warpath toward ever-higher tipped wage requirements may only exacerbate existing economic conditions. One review of the existing economic literature on the inflationary effects of wage hikes finds a 10 percent minimum wage increase raises prices by up to 0.3%. Another study by the American Enterprise Institute found the same wage hike could cause more dramatic inflation in the southern U.S. – up to 2.7% increases in price. A Stanford University economist also found raising the minimum wage drives the largest price increases for the poorest 20% of families.

While the general news suggests overall inflation is cooling, the restaurant industry is still experiencing unrelenting price inflation. Lawmakers should carefully assess ongoing economic conditions before implementing any new minimum wage mandates.