When McDonald's Talks Beef Prices, Bond Investors Should Be Listening
Sticky inflation is bad news for burgers - and bonds.
By Paul Rubillo ·
I caught McDonald's CEO Chris Kempczinski's comments yesterday and my inflation alarm went off! Beef costs "nearly doubled" over the last five years in McDonald's biggest markets! Wait what?
While I haven't been a regular customer of the burger chain for a number of years, I did have it recently and went through their new kiosk ordering system. Fairly seamless and not much human interaction until my order was ready and getting handed to me. I assumed the chain had employee costs contained but this other headline revealed another issue.
"Across the board, we're seeing that inflation is sticky," Kempczinski said. "It's sticky, not just in the U.S., but around the world." Sticky is the exact word the bond market has been quietly worried about for a while now. This should matter to anyone holding Treasuries, TIPS, or any corporate paper.
The discounting trap tells its own story
McDonald's and its rivals have been leaning hard into value menus and promotional pricing to keep traffic up. However, their own input costs (beef, labor, construction, etc.) aren't slowing down. Margin compression is happening in real time. It's a pattern worth watching: companies cutting consumer-facing prices while their own costs go in the other direction.
This means one of two things is coming, margins are getting squeezed until something breaks, or those costs eventually get passed through to the consumer. Either way, it's evidence that the inflation isn't cooling as fast as headline CPI prints might suggest.
Why beef specifically matters
Cattle herd sizes have been sitting near multi-decade lows, which means beef inflation has structural, supply-side roots. That's a different animal (pun intended) than labor cost stickiness. Supply-driven inflation doesn't respond to Fed policy the way demand-driven inflation does. You can't raise rates higher to produce more cattle.
What this means if you're holding fixed income
If ground-level inflation is running hotter than breakeven rates imply, TIPS become more attractive. Relative to nominal Treasuries, you're getting paid for inflation risk the market may be underpricing.
Duration risk cuts both ways here. Sticky inflation makes it harder for the Fed to cut aggressively, which supports the case for staying shorter-duration until the smoke settles. Floating rate notes and short-dated paper keep you closer to cash without the rate-cut disappointment risk.
Corporate credit spreads on consumer names need to be assessed a bit more carefully during this current environment. Margin compression at a company like McDonald's is a data point worth checking against the credit spreads on its bonds and its peers.
Globally speaking, Kempczinski's "around the world" assessment should have fixed income investors thinking about their diversification. Sticky inflation showing up in international rate markets should be expected.
The bottom line
A fast food CEO isn't a Fed governor, but he's paying beef invoices every single week, and that's a read on inflation that doesn't get revised a month later. When the person buying a few hundred million pounds of beef a year tells you costs are sticky, I pay attention whether I'm a customer or not.
Food-wise, I did enjoy the meal I had at McDonald's last time. I'll make note to pay attention to hamburger sticker prices when I go back to see if the company can continue to absorb the beef prices shock. An excuse for an adult Happy Meal and a prize. 😊