Rise in food prices could cut consumer confidence

The worst U.S. drought in at least 50 years may restrain consumer confidence and spending as it pushes Americans’ grocery bills higher later this year.

Food prices will increase an average 4 percent annual rate in the nine months ending June 2013, up from 1.5 percent currently, said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. That may trim real disposable incomes by 0.3 percentage point from the fourth quarter of 2012 through the first half of next year and reduce spending by a similar amount, he estimates.

The projected food-price increase will squeeze budgets of households already contending with a 13 percent gain in gasoline prices since early July and unemployment that is stuck above 8 percent three years into the economic recovery.

Consumer sentiment has yet to return to pre-recession levels, confidence gauges show.

“Energy is hitting us now, food is going to hit us later,” Feroli said. “It will be a headwind for consumers. It’s going to damp people’s perceptions of the economy.”

While the effect on total inflation will be limited and transitory, food and fuel costs have a disproportionate impact on confidence because consumers make frequent stops at grocery stores and filling stations. Food and fuel together account for about 24 percent of the consumer-price index, according to the Labor Department.

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

The average price of a gallon of gasoline at the pump rose to $3.75 on Sunday, up 42 cents since July 1, according to AAA, the nation’s largest motoring organization.

German business confidence fell in August for a fourth straight month as the sovereign debt crisis curbed growth in Europe’s largest economy.

In the U.S., a report Tuesday from the Conference Board may show consumer confidence was little changed in August. July’s reading of 65.9 compares with 87.8 in November 2007, before the start of the 18-month recession.

The Thomson Reuters/University of Michigan preliminary August consumer-sentiment gauge increased to 73.6, the highest level since May, from 72.3 the prior month.

The Bloomberg Consumer Comfort Index fell for the sixth straight week in the period ended Aug. 19 as Americans held more pessimistic views on 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.

Raquel Farah, 23, an administrative assistant in Washington, says she tries to fill her tank only once a month. Now she’s concerned about having to pay more for food, said Farah, who has relatives in the drought-stricken Midwest.

“It’s a hard time right now for everybody economically and every little bit contributes to those hard times,” she said. “It’s all added stress when you’re planning your budget.”

The Department of Agriculture has declared almost 1,600 counties in 32 states as natural-disaster areas after the drought seared millions of acres of pasture and cropland. Kansas, South Dakota, Nebraska, Missouri and Illinois are among states facing the greatest crop-yield losses, according to the department.

It will take time for agricultural commodity increases to show up on grocery store shelves because food companies buy raw materials months in advance. Price gains are limited because the farmers receive only a small portion of the retail prices, with the rest going to processing and distribution.

The nation’s corn harvest will be the smallest in six years, according to the Department of Agriculture. Corn and soybean futures each jumped to a record on the Chicago Board of Trade this month.

Some economists say concerns about the fallout from the drought are overblown.

“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.