More Americans will be thinking twice before they say yes to a fancy dinner out on the town.
The cost of dining out in January was up 5.1% year over year and up 0.5% compared to the previous month, according to the latest inflation data from the Bureau of Labor Statistics. On the other hand, the cost of groceries moderated, with a 1.2% increase compared to last year and a 0.4% increase compared to December.
"Historically, when commodity inflation runs ahead of labor inflation, grocery pricing pushes ahead of restaurants," Citi analyst Jon Tower wrote in a client note. "When labor inflation runs ahead of commodity inflation, restaurant prices tend to outpace grocery pricing."
Labor is a key pressure point this year, as 22 states raised their minimum wages on Jan.1, and Oregon, Nevada, and Florida are set to increase theirs later this year.
And California faces a looming wage jump as a result of a new fast food industry law. Beginning in April, food chains that have at least 60 locations nationwide will be required to raise their minimum wage for restaurant employees to $20 per hour.
As the bill rises, some customers will likely pull back on restaurant visits in favor of cooking at home. "You're going to see greater pivot at that lower income level," Tower told Yahoo Finance over the phone.
This is already putting pressure on brands like McDonald's (MCD). In its third quarter earnings call last week, CEO Chris Kempczinski called it a "battleground" to get the attention of the low-income consumer.
"There's some transaction size reduction" and "some trade down" among the demographic, he said.
Others with higher exposure to low-income consumers include Wendy's (WEN), Domino's (DPZ), and Taco Bell (YUM), per Citi's analysis.
Chili's parent company Brinker International (EAT) has also been trying to adjust to changing consumer sentiments. "We're seeing improved responsiveness to TV ads that showcase really sharp value," CEO Kevin Hochman said in a call with investors.
But customers who come in for deals aren't "buying as much alcohol or desserts," he said. The company is planning to use promotions like $6 margaritas to boost traffic.
More discounts could be coming. If foot traffic broadly "does not improve from this point forward," companies will have to offer better deals, said Tower, or lean into categories that may not be as inflationary, like fries or chicken over beef.
While Starbucks (SBUX) tends to skew toward a higher-income demographic, some of its customer base is changing their spending habits as well. The coffee chain's US foot traffic was up a mere 1% in its latest quarter, while the check size went up 4%.
Both numbers were under analysts' estimates, partially because the "occasional" customer visited less.
Starbucks drinkers are "managing their checks, managing their frequency, or doing a combination of both," said Tower.
But consumer staples companies that supply grocery stores, restaurants, and bars could be well positioned in 2024.
PepsiCo (PEP) CEO Ramon Luis Laguarta said on an investor call that the company is "putting a lot of focus" on the food away from home channel as people continue to go back to normal socializing patterns. The company is expecting to gain market share within the restaurant industry, per Laguarta.
How much people continue to go out will be the issue to watch for food companies that have large "away from home" businesses, Bank of America analyst Bryan Spillane told Yahoo Finance Live.
But moderating inflation likely won't result in lower prices in grocery aisles, said Spillane. Rather, consumer staples companies will hold the higher prices and reinvest the profit behind their brands.
Read more about the latest inflation data and what it means for markets:
Inflation: Consumer prices rise 3.1% in January, defying forecasts for a faster slowdown
Hot inflation reading reinforces the Fed's cautious approach to rate cuts in 2024
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Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at [email protected].