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Will Higher Food Prices Spoil Diners' Appetites?

Dining-out buffs could find themselves chewing on sticker shock as a side dish.

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Restaurant traffic has steadily improved for most operators over the past few months, indicative of an improving consumer spending environment, and supporting our mid-single-digit top-line growth forecast for the restaurant industry in 2011. However, we don't believe the magnitude of commodity inflation has been fully recognized by the market, and we would not be surprised to see cautionary revisions to full-year expectations from many restaurant companies during the coming quarters.

A heady mix of supply shocks and growing demand from developing markets has spawned a formidable surge in year-to-date protein, grain, and dairy commodity prices. Given these rising costs, we would not be surprised to see restaurant operators cooking up ways to offset the looming cost headwinds over the coming months. As hedges against input costs expire throughout the year, restaurant operators will undoubtedly be forced to either raise prices on customers, or swallow the cost increases themselves.

Jeremy Cohen does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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