Is the food and energy crisis fueling the recession?

News analysis

If more households spend on food and energy, will they change their consumption patterns?

With consumer demand gradually weakening and business activity slowing, the consequences of soaring food and fuel inflation could weigh on the wider economy.

But what does the data show and how are rising food and energy prices fueling the recession?

Pay more for food

In July, food price inflation reached 10.9%, the highest level since May 1979. Overall, all food and beverage items listed in the Bureau of Labor Statistics (BLS) jumped year over year, from bread to meat to coffee.

Food prices may not fall for some time after the Labor Department reported that prices paid to U.S. producers for finished consumer goods rose nearly 16% in the year to July. This is the largest increase since 1974.

Although commodity markets have eased in recent months, many agricultural products are on the rise again, including soybeans, wheat, corn, lean hogs and coffee.

The United States, for example, is about to harvest its smallest corn crop in three years.

This is terrible news for households that are already struggling to cover the cost of the grocery bill.

According to new research from Lending Tree, US households are spending 28% more on food than a year ago, as they spent an average of $407 per week on food in July, compared to $318 in May 2021. Plus, the percentage of Americans reporting food insufficiency — not enough to eat — and relying on credit cards to pay for groceries has ballooned.

Keeping the lights on costs more

Despite lower crude oil and gasoline prices, the energy index remains up 32.9% on an annualized basis. Heating oil increased by 75.6%, gasoline by 44% and electricity costs by 15.2%.

The meteoric rise in energy prices has forced motorists to change their habits.

Industry surveys show motorists are driving less, combining errands and doing fewer leisure activities due to the exorbitant cost of gas. Additionally, data from the Energy Information Administration (EIA) shows that gasoline demand was 8.434 million barrels in the week ending August 19.

Electricity costs have become so outrageous that 20 million households cannot afford to pay their monthly utility bills. Rising electricity costs and declining purchasing power resulted in a collective electricity bill of about $16 billion in June, double the $8 billion in December 2019.

Businesses are also suffering the agony of higher utility costs.

In June, Century Aluminum Co., the second-largest aluminum smelter in the United States, which accounted for one-fifth of domestic supply, had to shut down its Kentucky plant because it could not pay utility bills. electricity.

Wider effects on the economy

Weaker consumer demand could already be weighing on businesses, according to various indicators.

The S&P Global Manufacturing Purchasing Managers’ Index (PMI) fell to 51.3 in August. The services PMI fell to 44.1, while the composite PMI fell to 45. Anything below 50 indicates contraction.

S&P Global economists noted that rising input prices were reducing consumer demand, with many companies reporting that customers were focusing more tightly on inventory and essential spending.

“The August PMI flash data signaled further disconcerting signs for the health of the U.S. private sector. Demand conditions were dampened again, driven by interest rate hikes and strong inflationary pressures on customer spending, which weighed on activity,” Siân Jones, senior economist at S&P Global Market Intelligence, said in the report (pdf). “Excluding the period between March and May 2020, the fall in total production was the strongest since the series debuted nearly 13 years ago.”

The US economy is two-thirds driven by consumer spending. If Americans aren’t buying goods and services because they’re primarily focused on subsistence, whether it’s filling up on gas or putting bread on the table, business activity declines. and gross domestic product suffers.

Indeed, market analysts have been closely monitoring consumer demand data in recent months for signs of a slowdown.

In July, retail sales were flat at 0%, while personal spending edged up at a weaker-than-expected 0.1%. The personal savings rate also fell to just 5%, the lowest since 2008.

A new First Insight report, titled “The State of Consumer Spending: Inflation Fueling Recession Fears,” found that consumers are reallocating their budgets. The report learned that rising food prices are the top concern for 68% of consumers. This has caused them to cut spending in other areas, including restaurants, streaming services, electronic games and gym memberships.

Even priorities and behaviors in consumer food budgets are changing, said Greg Petro, CEO of First Insight.

“While inflation remains at the highest levels seen in the United States since 1981, consumers continue to find different ways to afford things,” Petro said in a statement. “Putting food on the table remains consumers’ top priority. We are seeing a reallocation of food budgets, with many consumers reducing their purchases of fresh produce and spending less on branded products. »

On the energy front, the World Bank warned in a blog post in June that “energy price shocks” can trigger “immediate knock-on effects” on economic activity and then lead to wider consequences. , from fiscal and monetary policy to investment uncertainty.

“The restart has stalled in the United States as it comes up against production and labor supply constraints, and we believe that US activity is now on the verge of contracting,” said said Tara Sharma, investment strategist at the BlackRock Investment Institute, in a note.

Will the United States become Europe?

While the United States could be at the start of a sharp contraction in business activity amid inflationary pressures in the food and energy sectors, Europe has been entrenched in this cycle for months.

Eurozone growth has slowed significantly, with factories in the region reporting a significant drop in demand, rising energy bills and the wider cost of living crisis impacting customer finances. The S&P Global Manufacturing, Services and Eurozone Composite PMIs fell to 49.7, 50.2 and 49.2, respectively, in August.

A growing chorus of economists believe it is almost inevitable that the euro zone and the UK will slide into recession.

“The European Commission’s economic sentiment indicator plunged in July, with forward-looking indicators pointing to an economic contraction in the second half of the year. Meanwhile, inflationary pressures are starting to ease, albeit gradually,” Peter Vanden Houte, chief eurozone economist at ING, wrote in a note.

With Fed Bank of Atlanta’s GDPNow already cut from 2.5% to 1.6% for the third quarter, high food and energy inflation is hurting the economy as consumers run out and businesses slow down. ‘activity.

The only silver lining is that cooling demand could be what cures inflation, which would come at the expense of the economy.

The opinions expressed in this article are the opinions of the author and do not necessarily reflect the opinions of The Epoch Times.

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Andrew Moran covers business, economics and finance. He was a writer and journalist for over a decade in Toronto, with bylines on Liberty Nation, Digital Journal and Career Addict. He is also the author of “The War on Cash”.

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