Drought-Driven Food Costs May Damp Consumer Sentiment: Economy

Monday, August 27, 2012
By Paul Martin

By Shobhana Chandra and Sandrine Rastello
Aug 27, 2012

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.”

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