By Colin Barr
February 7, 2011

Rising food and energy prices could deal a $70 billion blow to the economy, but the recovery is likely to limp along anyway.

If the recent run-up in energy and agricultural commodities persists, U.S. consumers will have to shell out $20 billion more for energy and $50 billion more for food this year, Capital Economics estimates.

Among other things, that squeeze on consumer budgets will eat up most of the payroll tax holiday bonus that Americans were supposed to get out of the deal in Congress that extended the Bush tax cuts, at some cost to the deficit. So much for the stimulus bump.

Even so, the weak U.S. recovery doesn’t appear to be at risk. The economy is showing signs of picking up, with industrial production rising at an almost 6% annual clip in December. Consumers have been spending more despite scarce jobs, weak wages and stagnant property prices, in a development that is promising if at least a little head-scratching.

“The household balance sheet is a little battle-hardened after what we dealt with in 2008,” said Robert Dye, senior economist at PNC. “Psychologically, this rise in commodity prices is not having the same impact. Consumers have been through this grind before.”

One way of gauging the pressure on consumers is to look at indexes designed to measure the same. The best-known is the misery index, devised during the 1970s by Chicago economist Robert Barro. It combines the headline unemployment and inflation rates.

Its latest reading was 10.9, which is up a shade from its level in mid-2010 but just half its 1980 peak of 22 and below its recent recessionary high water mark of 12.7.

There is no disputing that the financial crisis and the great recession were miserable. Even so, inflation remains a shadow of its 1970s self. Thanks to double-digit inflation, the misery index spent an entire decade, between 1973 and 1983, above 12 during the stagflation era.

A more relevant measure for our economic morass now, perhaps, is one derived from the misery index during the 2008 meltdown, PNC’s household economic stress index. It takes the misery index and subtracts the year-over-year change in house prices, on the logic that changes in the price of most Americans’ most valuable asset is an important factor in their spending.

By that measure, known catchily as the HESI, the squeeze on U.S. households right now is less than half as intense as it was at its 2008 peak. The PNC index hit 28 in mid-2008 (see chart, right) as oil surged to $147 a barrel and house prices tumbled by double digits.

Now, even with the vaunted double-dip in house prices under way, there is no sign of a return to those bad old days. Inflation remains subdued, despite the screaming to the contrary, and unemployment has slipped to 9% from a recent 9.8% in spite of weak payroll gains in the past two months.

That puts the HESI at around 12, and while it may creep higher for the rest of 2011 it is in no danger of challenging its 2008 level. While energy prices are rising, for instance, Dye sees no reason to expect gasoline to rise much more, given extensive stores. “We’re not in the danger zone there,” he said.

Of course, that’s not to say there’s no misery out there now. The broadest measure of unemployment, which counts those marginally attached to the labor force as well, shows one in seven Americans is underemployed. Food stamp use, meanwhile, has climbed a shocking 40% since the fall of 2008.

And with all that, the bite from food inflation has yet to arrive. Capital Economics forecasts that the price shock will take nine months to show up at the grocery store. It says the food component of the consumer price index will rise at a 7% annual clip later this year, as rises in the costs of sugar, corn and other agricultural commodities work their way through the system.

Even so, the CPI will likely peak at a 2.5% clip this summer. That offers a reminder not to lose sight of the underlying weakness of the economy. Unit labor costs fell 0.6% in the fourth quarter, for instance, in the latest sign of slack demand for workers.

It is the painstakingly slow recovery in employment, rather than the headline-grabbing moves in commodity markets, that will ultimately decide the fate of the U.S. economy.

“As long as oil and commodity prices don’t continue to rise at current rates, inflation will fall back later this year,” says Paul Dales of Capital Economics. “By the end of next year, outright deflation could still be a real threat.”

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