WASHINGTON - Americans face higher food prices at the supermarket because of a drought this summer, but the increase will not have a lasting impact on inflation or the Federal Reserve's thinking on monetary policy.
Corn and soybean prices on the futures market have surged to record highs amid the worst drought in half a century, with new crop contracts for corn rising 50 percent since early June and soybeans increasing about 35 percent.
"It's kind of like a transitory oil price spike. We get good rains next year and it's gone, it isn't something that the Fed will fight as inflationary," said Diane Swonk, chief economist at Mesirow Financial in Chicago.
"Even though it is inflationary, it would not change monetary policy."
When oil prices spiked early this year, the U.S. central bank viewed the impact on inflation as temporary. Inflation pressures have generally been benign against the backdrop of sluggish domestic and global demand.
The inflation outlook will be one of the key factors that will determine whether the Fed will ease monetary policy further this year to aid the flagging economic recovery.
The Consumer Price Index increased 1.7 percent in June from a year ago, matching May's gain and below the Fed's 2 percent target.
Food prices -- which account for about 14.2 percent of the CPI -- increased 2.7 percent on a year-ago basis, pushed by rises in the cost of fruit and vegetables and meat products.
The latest Reuters survey forecast CPI averaging 2.0 percent in 2012 and 1.9 percent next year.
New-crop soybean and corn contracts for delivery in November and December respectively hit all-time highs last week. Economists said it will take at least six months for the impact to carry through to the supermarket.
"The effects become lagged because food processors have already locked in their commitments with the old crop. They will not be felt so much in 2012 as in the first half of 2013," said Howard Simons, an analyst at Bianco Research in Chicago.
How long that will last depends on the duration of the dry spell that is affecting more than half of the country and what the southern hemisphere crop cycle looks like, Simons said.
The National Oceanic and Atmospheric Administration last week forecast higher-than-average temperatures over the vast majority of the country's 48 states in August, with below-average precipitation for Midwest areas already hit by drought.
The U.S. Agriculture Department will survey fields next month and offer new estimates on the corn and soybean crop yield for this year. They will also provide new estimates for 2013.