Is the Food and Energy Crisis Fueling the Recession?

Inflation (1)

If more households are spending on food and energy, will they modify their consumption patterns?

With consumer demand gradually weakening and business activity slowing down, the consequences of surging food and energy inflation might be weighing on the broader economy.

But what are the data showing and how are higher food and energy prices fueling the recession?

Paying More for Food

In July, food inflation hit 10.9 percent, the highest level since May 1979. Across the board, every food and beverage item listed on the Bureau of Labor Statistics’ (BLS) consumer price index has surged on a year-over-year basis, from bread to meat to coffee.

Food prices might not ease for quite a while after the Department of Labor reported that prices paid to U.S. producers for finished consumer goods increased close to 16 percent in the year through July. This represented the biggest increase since 1974.

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

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

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

According to a new study by Lending Tree, U.S. households are spending 28 percent more on food than they were a year ago as they spent an average of $407 a week on food in July, up from $318 in May 2021. In addition, the percentage of Americans reporting food insufficiency—not enough to eat—and relying on credit cards to pay for groceries has swelled.

Keeping the Lights on Is More Expensive

Despite crude oil and gasoline prices coming down, the energy index remains up 32.9 percent on an annualized basis. Fuel oil has advanced 75.6 percent, gasoline has climbed 44 percent, and electricity costs have jumped 15.2 percent.

The meteoric boost in energy prices forced drivers to change their habits.

Industry surveys show that motorists are driving less, combining errands, and doing fewer leisure activities because of the exorbitant cost of gasoline. Moreover, Energy Information Administration (EIA) data show that gasoline demand stood at 8.434 million barrels in the week ending Aug. 19.

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

Businesses are also enduring the agony of higher utility costs.

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

Broader Effects on the Economy

Waning consumer demand might already be weighing on businesses, according to various metrics.

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

Economists at S&P Global noted that higher input prices diminished consumer demand, with many firms reporting that clients were concentrating on inventories and essential spending more closely.

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

The U.S. economy is two-thirds driven by consumer spending. If Americans are not purchasing goods and services because their main focus is on sustenance, be it filling up a tank of gas or putting bread on the table, business activity shrinks and the gross domestic product takes a hit.

Indeed, market analysts have been closely monitoring consumer demand data in recent months to find hints of a slowdown.

In July, retail sales were flat at 0 percent, while personal spending edged up at a lower-than-expected pace of 0.1 percent. The personal savings rate also dipped to just 5 percent, 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 biggest concern for 68 percent of consumers. This has them cutting spending in other areas, including dining out, streaming services, electronic games, and gym memberships.

Even priorities and behaviors in consumers’ food budgets are changing, said Greg Petro, CEO at First Insight.

“As inflation remains at the highest levels seen in the U.S. since 1981, consumers continue to find different ways to afford things,” said Petro in a statement. “Putting food on the table remains consumers’ top priority. We are seeing reallocation of food budgets, with many consumers cutting back on fresh produce and spending less on name brand products.”

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

“The restart is stalling in the U.S. as it bumps into production and labor supply constraints, and we believe U.S. activity is now set to contract,” said Tara Sharma, an investment strategist at BlackRock Investment Institute, in a note.

Will the US Become Europe?

While the United States might be in the beginning stages of a sharp contraction in business activity amid inflationary pressures in food and energy, Europe has become entrenched in this cycle for months.

Eurozone growth has slowed down considerably, with factories across the region reporting a significant decline in demand as rising energy bills and the broader cost-of-living crisis impacted customers’ finances. The Eurozone S&P Global Manufacturing, Services, and Composite PMIs slipped to 49.7, 50.2, and 49.2, respectively, in August.

A growing chorus of economists believes it is almost an inevitability that the eurozone and the United Kingdom will slip into a recession.

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

With the Atlanta Fed Bank GDPNow already cut from 2.5 percent to 1.6 percent for the third quarter, elevated food and energy inflation is affecting the economy as consumers are tapped out and businesses slow down activity.

The only bright side is that cooling demand might be what cures inflation, which would be at the expense of the economy.

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

About the Author

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

Article cross-posted from our premium news partners at The Epoch Times.

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