Fed’s Beige Book Sounds Red Alert on Inflation

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Businesses are telling Federal Reserve officials that inflationary pressures are pushing up their costs and raising consumer prices, the Federal Reserve said in a report Wednesday.

“Most Districts reported significantly elevated prices, fueled by rising demand for goods and raw materials. Reports of input cost increases were widespread across industry sectors, driven by product scarcity resulting from supply chain bottlenecks,” the Fed said in its October Beige Book, an occasional compilation of reports from the 12 regional Federal Reserve banks about what they are hearing from local businesses.

Although conveyed with the mild language typical of the Beige Book, Fed watchers regard the tone of the report’s inflation news as a sign that officials are becoming increasingly concerned.

“Many firms raised selling prices indicating a greater ability to pass along cost increases to customers amid strong demand,” the Beige Book reports. “Expectations for future price growth varied with some expecting price to remain high or increase further while others expected prices to moderate over the next 12 months.”

The supply-chain problems and a shortage of workers are not just pushing up prices. They are also holding back growth, according to the Beige Book.

“Several Districts noted, however, that the pace of growth slowed this period, constrained by supply chain disruptions, labor shortages, and uncertainty around the Delta variant of COVID-19,” the Beige Book reports.

The Fed noted that job growth was only “modest to moderate” in recent weeks. Despite a high level of demand for workers, “labor growth was dampened by a low supply of workers,” the Fed said.

Some highlights from the regional Fed reports of inflationary pressures and supply chain disruptions.

  • Boston: “Retailers and manufacturers posted moderate to steep price increases amid ongoing supply disruptions.”
  • New York: “Growth in the regional economy slowed to a modest pace in recent weeks, as supply disruptions and labor shortages have impeded economic activity… Businesses reported ongoing widespread escalation in both input costs and selling prices.”
  • Philadelphia: “Fear and uncertainty of the Delta variant continued to constrain growth, but contacts were most worried by ongoing labor shortages and supply chain disruptions.”
  • Cleveland: “While demand was still solid, supply chain disruptions tempered the pace of sales and output growth. The expiration of supplemental unemployment insurance benefits and a return to school did little to alleviate worker shortages, and wages continued to rise. This and higher nonlabor input costs put further upward pressure on selling prices.”
  • Richmond: “The regional economy increased at a modest rate as growth was constrained by labor shortages and shortages and delays receiving goods and raw materials needed for business…Prices remained elevated compared to year-ago levels.”
  • Atlanta: “Economic activity expanded moderately. Labor markets remained tight and wage pressures intensified. Some nonlabor costs stayed elevated. “
  • Chicago: “Overall, prices rose strongly in late August and September, though contacts expected increases to slow to a moderate pace over the next 12 months. There were large increases in producer prices, driven by passthrough of higher materials, energy, labor, and transportation costs. A few contacts noted that they were changing prices more frequently than usual. Consumer prices moved up robustly overall. Contacts pointed to solid demand, limited inventories, increased costs, and a greater ability to pass cost increases on to customers as sources of the higher consumer prices.”
  • St. Louis: “Labor shortages and supply chain issues continue to be cited as primary issues. Increased input costs have led to cost pressures across industries, and firms with the power to do so report passing on increased costs to consumers.”
  • Minneapolis: “Price pressures remained elevated; certain input prices eased, but firms were passing more of their input costs through to final prices. Manufacturing increased, with one contact noting that passing along higher prices hadn’t hampered demand.”
  • Kansas City: “Material input prices also increased, but contacts were mixed on their ability to pass on higher material and labor costs to their customers. Businesses either reported being able to pass along the majority of higher costs to their customers or only a small portion. Price pressures from transportation costs also expanded in recent weeks. Construction materials continued to be an exception to rising input prices, declining further over the past month.”
  • Dallas: “Employment growth was robust, and wage and price growth remained highly elevated.”
  • San Francisco: “Labor market tightened further as wages and price levels climbed up.”

Growth was reported as “modest” by Boston, New York, Richmond, Chicago, and Philadelphia Feds. That is generally understood as indicating a low level of economic growth.

A bit better is “moderate,” which was the descriptive term used by the the Fed banks in Atlanta, St. Louis, Minneapolis, Kansas City, and San Francisco.

The Dallas Fed reported growth as “solid.” The Cleveland Fed appeared to have the strongest growth assessment, saying economic growth “remained strong.”

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