July 11 (Bloomberg) -- Japanese consumers became the most pessimistic they've been in at least 26 years as higher gasoline prices and food costs eroded their spending power.

The sentiment index dropped to 32.6 last month from 33.9 in May, the Cabinet Office said today in Tokyo, the lowest since the government began compiling the figures in 1982.

Higher prices are crimping profits, making it difficult for companies to raise wages and clouding the outlook for consumers in the world's second-largest economy. Personal spending, which accounts for more than half of gross domestic product, is dwindling and may have caused the economy to contract last quarter.

``This is a sign that households are overwhelmed by the rising prices of daily necessities,'' said Yoshiki Shinke, a senior economist at Dai-Ichi Life Research Institute in Tokyo. ``Consumer spending may continue to decline this quarter.''

Wages rose 0.2 percent in May, the slowest pace this year, while the prices of frequently purchased goods grew 2.4 percent, prompting households to pare spending at the fastest pace since September 2006 in the month. Japan's stocks fell for a 12th day last week, the longest losing streak in 54 years.

The Nikkei 225 Stock Average fell 0.2 percent to 13,039.69 today.

Most on Record

Some 87.2 percent of households predict prices will rise a year from now, the most on record, today's report said. Of the four components to gauge consumer sentiment, the outlooks for livelihood and willingness to purchase durable goods fell to the lowest level ever.

``This shows consumers can't afford to buy nonessentials amid increases in the prices of daily necessities,'' said Tatsuya Ishii, deputy director at the Cabinet Office's statistics division.

A 27-year high inflation rate in producer prices is prompting companies to pass their costs onto consumers. Skymark Airlines Inc., Japan's largest discount carrier, plans to raise ticket prices for at least the second time in three months, President Shinichi Nishikubo said this week.

Crude oil rose to $145.85 a barrel last week, the highest ever, and retail gasoline prices have surged more than 18 percent this year to a record 181.5 a liter ($6.40 a gallon).

``It's incredible I can't fill my tank with 10,000 yen,'' said Hiromichi Shimizu, a Tokyo taxi driver. ``On top of that, food prices are even going up at my favorite discount supermarket, and that has me concerned about the future.''

To contact the reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net

Last Updated: July 11, 2008 02:32 EDT