Consumer inflation could stabilize, positive for restaurant sales

Market Realist

Macro European indicators influence restaurant companies' sales (Part 11 of 12)

(Continued from Part 10)

The significance of CPI to restaurant sales

The CPI (consumer price index) is another indicator that investors can use to get a sense of restaurant sales. It reflects the price of the basket of consumers goods that an average household will spend on. The CPI often rises when the economy picks up. Higher economic activity tends to push up oil prices, which could push the cost of transporting agriculture goods up. Food prices can also be pulled higher because of higher overall consumption. So rising CPI is often a positive reflection of higher restaurant sales.

The past, present, and future

When the global economy started to recover in 2009, the CPI for the United Kingdom and the Eurozone also followed suit, rebounding around August or September of 2009. They climbed to as high as 5.0% for the United Kingdom and 3.0% for the Eurozone in August 2011, before economic growth fell. While the Eurozone’s CPI continued to fall until recently, the United Kingdom has somewhat stabilized— weakness for the Eurozone and somewhat better prospects in the United Kingdom.

The latest data available from the national statistics group shows that CPI grew 2.8% year-over-year in the United Kingdom for July, 1.3% in the Eurozone for August, and 6.5% for Russia in August. With the exception of Russia, which stood unchanged, CPI growth fell from the prior month for the Eurozone and the United Kingdom. But that could change soon if economic momentum in Europe continues to turn around.

The proper way of using the CPI

We can consider the CPI as somewhat of a lagging indicator during economic recovery after such a large decline in business activity because people aren’t willing to pick up expenditure as quickly and businesses are going to rush in to start hiring again. Even if agriculture prices are rising, companies are unlikely to be able to pass on the rise in cost to consumers due to weak consumer demand. So investors may want to use the indicator as a confirmation of increasing economic activity rather than a leading indicator, and when the consumer price index rises, they can possibly expect restaurant sales growing at a faster pace.

For the past few years, the CPI has lagged other indicators such as the OECD leading indicator, service PMI, manufacturing PMI, and even food retail sales. But what’s great about the consumer price index is that it helps investors get a feel of when policymakers will really start stepping on the accelerator to tighten monetary policy and cool economic growth—for uncontrolled inflation can easily go into hyper-inflation if people overall expect inflation to continue higher. So investors shouldn’t totally disregard the consumer price index as a useless indicator.

On a final note, the CPI can increase because of supply issues, which can negatively affect restaurant sales (as well as other retails) because it becomes more expensive to eat out and economic growth may cool. So it’s also important for investors to know whether the CPI is higher because of supply or demand. Russia’s CPI has been consistently higher than countries like the United Kingdom and the Eurozone because, firstly, it’s an emerging economy, so high inflation tends to be the norm (although very high inflation is negative), and, secondly, because of higher food costs due to supply disruptions.

Continue to Part 12

Browse this series on Market Realist:

View Comments (8)