The Real Reason Fast Food Is So Expensive

I recently drove to the local KFC and ordered a 12-piece meal to go. The price was just under $50 (tax included). Fortunately, I had a coupon that saved me some money, but I'd be lying if I said I didn't feel some sticker shock.

Inflation has of course been a major issue in recent years, but fast food prices in particular seem high, and many consumers are getting angry about it.

McDonald's recently took heat over news of an $18 Big Mac Meal that executives responded to by publishing an online letter, explaining that the price was unusually high.

"I can tell you that it frustrates and worries me, and many of our franchisees, when I hear about an $18 Big Mac meal being sold - even if it was at one location in the US out of more than 13,700. More worrying, though, is when people believe that this is the rule and not the exception."

The $18 Big Mac meal (for now, served only in Connecticut) is indeed an outlier. The average price of a Big Mac in the US is $5.29, a 21-percent increase from 2019. Still, data show the price of eating out has outpaced inflation in recent years, rising more than 40 percent since 2017, compared to a general inflation rate of 36 percent over the same time period. And looking strictly at major fast food franchises, the inflation gap gets wider.

Some people say high fast food prices are little more than "price gouging."

"When I was a boy, Dad could take the family of five to McDonald's for dinner for $1.35. Now it costs over $70 dollars," one X user complained. "Corporate greed is destroying the country."

The idea that McDonald's wasn't greedy in 1960, 1990, or 2010, but suddenly became greedy in the 2020s, doesn't quite pass the economics smell test. Moreover, the mega franchise posted a profit miss in its latest earnings call, as global sales growth slid for a fourth consecutive quarter.

So if "greed" doesn't explain the high price of fast food, what does?

Americans Are Eating Out a LOT

I decided to take my family out to lunch last week to celebrate the end of the school year and to see for myself how restaurants are doing, and what they're charging. While we eat at restaurants frequently (probably once a week), we rarely eat fast food.

Initially we went to Culver's. We didn't stay there, however. The restaurant was so busy, we could barely get through the doors. So we drove a mile up the road to McDonald's, ordering our meal on the way.

With the discount on the app, we got what I considered to be a good deal: two double cheeseburgers, one large fry, a McChicken, and 10 nuggets for about $12. This was the same price as a single Double Bacon Quarter Pounder with Cheese meal.

When I went inside the restaurant to get the meal, two things stood out to me. First, the restaurant was just as busy as the Culver's we had just stopped at. It was an absolute flurry of activity. Customers were bustling and employees were hustling.

The second thing I noticed was that it was a highly efficient activity. Customers were being served in various ways by delivery workers, cashiers, and managers, while people in the back took orders, prepared food, and filled orders. I was only inside the restaurant for about 90 seconds, but I immediately understood that I was witnessing something impressive, an organized chaos not unlike a Chick-fil-A drive-thru.

I share this anecdote for a reason. Though prices for fast food may be high, consumers don't seem to be dissuaded. The McDonald's restaurant I witnessed this week was the busiest one I've seen in years - perhaps ever.

The data back up my anecdotal experience.

Though a recent Lending Tree survey showed that nearly 8 in 10 people (78 percent) say they view eating out "as a luxury," the same surveys show that 75 percent of Americans eat fast food weekly.

That figure is substantially higher than a generation ago, when about 40 percent of Americans said they ate fast food at least once a week, according to a Pew Research Center report from 2006.

Of Low Supply, and High Demand

Without question, fast food prices are higher because of inflation. Expanding the money supply by roughly 33 percent in 18 months led to increased demand for goods and services, which led to higher consumer prices.

But the thing about prices is that they're changing constantly for all kinds of reasons, including changes in labor costs, production costs, supply, demand, and various other factors. While many things got a lot more expensive during the Fed's money-printing bonanza, some prices rose only slightly, while the prices of some goods even declined.

At their most basic level, prices are determined by supply and demand.

When demand is high and supply is low, prices increase. Conversely, when demand is low and supply is high, prices decrease. (When supply and demand intersect, market equilibrium occurs and prices are constant - at least for a while.)

Many Americans are complaining about high prices, but demand for fast food remains quite high, despite prices that many people regard as "too high." Perhaps this demand resilience stems from the fact that we're talking about food - tasty burgers, fries, and Cokes no less - which might be difficult for people to give up. (Will power is not exactly a conspicuous virtue these days.)

Still, it remains to be seen if the trend can continue. Consumers might be responsive to their stomachs, but they are also sensitive to prices.

"Nothing has made me cook at home more than fast-food prices," one man told CBS's MoneyWatch.

McDonald's CEO Chris Kempczinski made a similar point after the McDonald's Corporation's last earnings call.

"[Consumers] are more discriminating with every dollar they spend," Kempczinski said, while discussing the company's sales slide.

This is exactly what high prices are supposed to do. Prices are signals to consumers and corporations alike. They tell us when to buy and when to conserve; when to invest and when to forego. Few have explained this phenomenon better than the economist Thomas Sowell.

"Prices are not just arbitrary numbers plucked out of the air or numbers dependent on whether sellers are 'greedy,' or not," Sowell observed. "In the competition of the marketplace, prices are signals that convey underlying realities about relative scarcities and relative costs of production."

When Sowell speaks of scarcity, this includes not just potatoes and beef, but physical space - something I had not thought of until my recent visits to fast food restaurants.

If Culver's and McDonald's are this busy with burger prices high, I thought, how busy would they be if prices were lower?

So the next time someone brings up high fast food prices, you can explain it to him.

Fast food prices are high because demand for fast food remains really high, despite those higher prices.