- Flickr/Laura Bittner
There are two things the Federal Reserve desperately wants to see in the the US economy: inflation and wage growth. And based on commentary from The Cheesecake Factory, of all places, it may just be getting its wish.
The Fed for over a year has cited increasing wage pressure as a prerequisite to show that the US economy is strong enough for interest rate hikes.
This is important because it not only shows a tighter labor market and full employment – one of the central banks’ two goals – but also, in its understanding, leads to an increasing rate of inflation, its second goal, which has been persistently under the Fed’s 2% target.
Based on The Cheesecake Factory’s quarterly earnings call on Wednesday, it appears that, at least anecdotally, both of those trends are starting to play out.
On the one hand, according to The Cheesecake Factory’s CFO, Douglas Benn, the chain is starting to see an increase in what it has to pay workers. In fact, the company is expected to raise wages for employees by an average of 5% in 2017, up from 3-4% in 2015.
“Labor’s a big part of it. We’re at 5% wage rate inflation – we expect that the comp store sales for the year at 1% to 2%, as we’ve talked about, we’ve been managing through the industry labor pressure and continue to believe, as I said earlier, that we have pricing power in 2017,” Benn said during the call.
The second part of that statement is key: the pricing power.
Before now, many businesses were unable to raise prices without seeing a corresponding decline in sales. According to the Cheesecake Factory, comparable store sales actually increased from the same quarter the year before by 1.7%, and 2.6% of the sales increase came from increased pricing while traffic dragged.
So some of the wage increases were passed onto consumers in the form of higher prices, and higher prices means inflation. Thus the wage increases and pricing power are creating a virtuous cycle and leading each other higher.
Even in the state where the wage increases have been the highest, California, Benn said that The Cheesecake Factory has been able to keep up its pricing power.
“One of the markets that we’ve had the most government-regulated wage rate increases has been California,” Benn said. “And then when I talked about geographies, California is actually our best-performing market.”
To be fair, this is only one company in the US, but with fairly flexible pricing and a large work force – The Cheesecake Factory employs nearly 40,000 people – it is an interesting anecdotal piece of evidence that should be an encouraging sign for the US economy to meet the Fed’s goals.