Question

Inflation in the United States is currently at 1.7%. What affect will this have on businesses with regards to the economic concept of menu costs? What businesses would be most affected by menu costs and does this ultimately help or hurt the inflation level in the economy?

Answer 1

Menu costs for restaurants are essentially the prices of the products it sells. Inflation being at 1.7%, the businesses will try to increase their product prices as the input costs rise. If food inflation rises then businesses will also increase the prices marginally and will have to print more menu cards or keep electronic ones which can be changed instantly. But not all businesses can afford to change the menu cost. Some because of competition have to keep the prices constant, by using less of the products which have turned expensive, thereby reducing the cost of menu change and keeping prices constant.

Businesses which have variable costs and don't have fixed contracts for food will suffer the most due to increase in price level. This will ultimately hurt the inflation level as due to variable costs they will feel the pain of spending a higher amount of input cost, thereby passing on the price rise to the customer will entails the law of demand and will hurt the inflation level in the short run, till the economy stabilizes in the long run.