Drought-Driven Food Costs May Damp Consumer Sentiment

Sara J Dufort

Due to the severe drought that has affected the Midwest, food costs are expected to rise for the next nine months.

The drought, which is the worst in decades, has already destroyed more than half of the United States’ corn crop. The U.S. Department of Agriculture has already declared 1,600 counties in 32 states as natural disaster areas, after the drought has affected millions of acres of pastures and croplands.

According to the World Bank, global food prices have already jumped 10 percent from June to July, and the price of corn and wheat has already risen by 25 percent. While the drought is not only dire for the farmers, increased prices on corn, wheat and soybeans also mean that the budgets of American citizens will be pushed to their limits.

While the World Bank does not believe that people will riot as they did in 2008 when food prices spiked, it does not mean that citizens will not be struggling.

According to Michael Feroli, chief U.S. economist at JP Morgan Chase & Co., disposable incomes may be trimmed by 0.3 percent. Since the consumer sentiment has still not returned to pre-recession level, consumers are not going to take this news well.

There has already been a 13 percent increase in gasoline prices, and the next item to rise is going to be food prices.

Despite the fact that these increases will not affect total inflation levels, fuel and food prices account for approximately 24 percent of the consumer-price index, according to the Labor Department.

This is because unlike other products that the consumer buys less frequently, citizens make regular stops at the grocery store and gas stations.

“Even though it may not have a big impact on headline inflation, it can affect inflationary expectations,” Feroli said.

In addition, The Bloomberg Consumer Comfort Index fell for the sixth straight week on Aug. 19, which shows that Americans have a negative outlook when it comes to their finances.

“Consumers don’t have a lot of cushion,” said Omair Sharif, a U.S. economist at RBS Securities Inc. in Stamford, Conn. Unemployment and weak job growth have left little prospect for higher wages, which will likely “stagnate,” he said.

While it is clear that harder times are ahead when it comes to trips to the grocery store, it is going to take awhile until the prices actually show up at the checkout. The agricultural commodities increases will not show up for a while because food companies buy raw materials months in advance. The increased food prices will be an extra expenditure for a while, but economists believe that not everything is going to be bad.

“Rising food prices are obviously something to keep an eye on, but they’re not likely to change the outlook on inflation or on growth,” said Kevin Cummins, an economist at UBS Securities LLC in Stamford, Conn. “The direct impact from higher food prices will be marginal.”

It is clear that economic times are hitting Americans hard, and any additional spending is added stress when it comes to making a budget.

According to Feroli, the impact on inflation will subside in the second half of next year unless there is another drought.

“I wouldn’t expect food inflation to persist.”

One hopes that the higher food prices will not be too much of a burden to American citizens and that next year there will be more rain to prevent another drought like this from occurring.