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May 1, 2018 | Inflation Is Back, Part 5: “The Cost To Run A Restaurant In New York City Is Unbearable”

John is author or co-author of five books, including of The Money Bubble, The Collapse of the Dollar and How to Profit From It, Clean Money: Picking Winners in the Green-Tech Boom and How to Profit from the Coming Real Estate Bust. A former Wall Street analyst and featured columnist with, he currently writes for CFA Magazine.

If you’re running a business and the price of one thing goes up, you can work around it by economizing elsewhere. But when everything – wages, rent, supplies, taxes – goes up simultaneously, you have a problem that can be solved one of only two ways: Raise prices or close up shop. That’s the dilemma apparently facing restaurants pretty much everywhere.

In New York City, they’re trying to split the difference by kind of raising prices but calling it something else:

City restaurant owners propose diner surcharge to offset rising costs

(Metro) – Amid rising rent, wage and food costs, New York City restaurant owners are urging city officials to allow them to institute a diner surcharge to offset such expenses that they say could be detrimental to their businesses.

“The cost to run a restaurant and employ people in New York City is unbearable for many full-service restaurants. If you want to support local restaurants and staff, allow us the option of using a clearly disclosed surcharge to generate the revenue to simply survive,” a coalition of more than 100 restaurateurs wrote to Mayor Bill de Blasio in an open letter that was displayed at City Hall Wednesday.

“As restaurateurs we are suffering, and our employees’ livelihood are being threatened, too,” the letter continued, and highlighted ways they’ve had to work around growing expenses, including laying off tipped employees, cutting hours, changing menus, closing restaurants “which will continue closing at an increasing rate” and raising menu prices, which “cannot come close to offsetting mandated wage increases and real estate costs.”

The issue is reaching a critical mass for restaurant owners as Gov. Andrew Cuomo mulls a potential minimum wage increase to $15 per hour for tipped employees, who currently make $8.65.

“We have been waiting in good faith, for two years, for our city to allow us to use a clearly disclosed surcharge. During that time, our business have been further damaged,” the coalition’s letter concluded.

The idea of soaring costs is new to young Americans whose experience is limited to the apparent (though often illusory) price stability of the past decade. But it’s both familiar and scary to folks who were around in the 1970s when “wage and price spiral” was a common theme in the media. Labor markets get tight, wages rise, businesses are forced to raise prices to pay their employees, customers see their cost of living rise and demand raises to compensate and so on, until price pressures in one sector spread to most others.

Here’s another example, from an industry that’s far removed from food service but facing similar pressures:

Airline Cost Of Maintenance May Rise Just As Labor Rates And Fuel Prices Are Also Increasing

(Forbes) – Last December the International Air Transport Association (IATA) warned that the biggest challenge for airlines in 2018 would be the increasing costs of fuel and labor, which make up more than half of carriers’ operating expenses. Now, there are signs that the pressure on the bottom line won’t end there: Operators may face higher costs for maintenance as well, with both wages for aircraft technicians and the prices on aircraft parts and replacements on the rise.

Executives from the maintenance, repair, and overhaul (MRO) industry told the Oliver Wyman 2018 MRO Survey they are already having to deal with higher costs for materials and labor in recent months and expect both to continue to rise for the foreseeable future. The increases are pushing up operational expenses for airlines and the maintenance businesses that service them and could eventually hurt their bottom lines.

In addition to rising prices for parts, a tight supply of mechanics and other MRO technical workers is pushing up wages. As baby-boomer technicians begin to retire in record numbers, the MRO industry is finding insufficient millennial candidates with the needed skills and interest to take their places. The timing could not be worse: Last year’s Oliver Wyman Fleet Forecast shows global airlines adding 10,133 planes by 2027, growing the fleet by 40 percent to 35,501.

This trend seems to have come out of nowhere but it’s actually a predictable result of the income and wealth inequality that’s developed during the current Fed-driven asset inflation. Note the cyclicality; the 99% who are being ripped off eventually decide to flex their political muscles and demand higher wages – either through collective bargaining or the political process (hence the $15 minimum wage movement) – or by simply refusing to work for crappy wages, creating the labor shortage that’s causing so much corporate angst today.

inflation is back part 5 income inequality

Either way, the resulting shift in resources pushes up consumer prices – which the government defines as bad – and, eventually, depresses financial asset prices. In effect, workers start clawing back their share of national wealth from the owners of stocks and buildings.

What should you own in this kind of environment? You know the answer:

inflation is back part 5 gold 1970s

The other posts in this series are:

Inflation Is Back, Part 1: Does This Mean Spiking Interest Rates?

Inflation Is Back, Part 2: Now It’s Trucks And Teens

Inflation Is Back, Part 3: Home Prices Jump Again And “$3 Gas Is Coming”

Inflation Is Back, Part 4: Maybe The Phillips Curve Was “Just Resting”

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May 1st, 2018

Posted In: Dollar

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