Costs Pinch Consumers, Companies Still Grappling With Sluggish Economic Recovery.

Surging prices for food staples from coffee to meat to vegetables are driving up the cost of groceries in the U.S., pinching consumers and companies that are still grappling with a sluggish economic recovery.

Federal forecasters estimate retail food prices will rise as much as 3.5% this year, the biggest annual increase in three years, as drought in parts of the U.S. and other producing regions drives up prices for many agricultural goods. The Bureau of Labor Statistics on Tuesday reported that food prices gained 0.4% in February from the previous month, the biggest increase since September 2011, as prices rose for meat, poultry, fish, dairy and eggs. Globally, food inflation has been tame, but economists are watching for any signs of tighter supplies of key commodities such as wheat and rice that could push prices higher.

In the U.S., much of the rise in the food cost comes from higher meat and dairy prices, due in part to tight cattle supplies after years of drought in states such as Texas and California and rising milk demand from fast-growing Asian countries. But prices also are higher for fruits, vegetables, sugar and beverages, according to government data. In futures markets, coffee prices have soared so far this year more than 70%, hogs are up 42% on disease concerns and cocoa has climbed 12% on rising demand, particularly from emerging markets.

Drought in Brazil, the world's largest producer of coffee, sugar and oranges, has increased coffee prices, while dry weather in Southeast Asia has boosted prices for cooking oils such as palm oil.

Though rising, U.S. food inflation isn't yet near some lofty recent levels. In 2008, food prices jumped 5.5%, the most in 18 years, and they climbed 3.7% in 2011. Inflation also could be tempered if U.S. farmers, as expected, plant large corn and soybean crops this spring and receive favorable weather during the summer. That would hold down feed prices for livestock and poultry, as well as ingredient costs for breakfast cereals and baked goods.

Food prices have gained 2.8%, on average, for the past 10 years, outpacing the increase in prices for all goods, which rose 2.4%, according to the government. Overall consumer prices are expected to rise 1.9% this year, according to economists surveyed by The Wall Street Journal.

Still, the price increases pose a challenge for food makers, restaurants and retailers, which must decide how much of the costs they can pass along and still retain customers at a time of intense competition and thin profit margins. During previous inflationary periods, food makers switched to less-expensive ingredients or reduced package sizes to maintain their profit margins. Retailers and restaurants usually raise prices as a last resort.

In each of the past two years, global food prices on average declined from the previous year, as farmers ramped up production of wheat, sugar and other commodities.

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