Economy
6:30 pm
Thu July 19, 2012

Midwest Drought Might Drain Pockets in PA

The drought in the Midwest is bad enough to cause economic ripple effects across the country, including noticeable price hikes in Pennsylvania grocery stores in coming months, according to PNC economist Kurt Rankin.

"The drought may not affect western Pennsylvania directly, although I haven't had to cut the grass quite as much this summer," Rankin said, "but we will see the price increases."

Because farming in the Midwest is a substantial source of food across the country, consumers can expect to pay a little more for just about everything. "This would be a chain effect. This would be not only grains or fresh produce," Rankin said. "The domino has fallen." For example, dry conditions affect crops that feed cattle, which plays into prices for milk, beef, and so on down the line.

Rankin said the timing is poor for the U.S. economy. "In terms of consumer spending, and taking money that would be spent or could be spent on consumer goods out of consumers wallets because they have to buy staples like food," Rankin said, likening the problem to the exacerbating effects of higher gas prices.

Wages, however, have outgrown inflation since the end of 2011. "So while consumers remain cautious and are not spending, that's more of a psychological impact or a lack of job creation impact than an inability to spend," Rankin said. The idea that food prices might be on the rise, however, is one more fear that may prevent people from reaching into their pockets. "It puts one more headwind up against the possibility of the U.S. economy accelerating going into the second half of the year."

The good news is the prices haven't gone up yet. Economists are seeing upticks in commodity prices, but don't expect these increases to translate to consumer goods until late summer or early fall, Rankin said.

Assuming the rains come back again next year, Rankin is relatively confident prices will go back down, but can't be certain. "Because these food and energy prices are particularly volatile not just year-to-year but from month-to-month."