Elevated inflation, supply chain snarls weighing on US businesses, Fed's Beige Book says

Fed is ‘powerless’ against inflation: Expert

Morgan Creek Capital Management’s Mark Yusko weighs in on the markets and inflation.

Supply chain bottlenecks, the highest inflation in decades and a persisting labor shortage are weighing on businesses across the country, according to a new Federal Reserve report. 

In its region-by-region roundup of anecdotal information known as the Beige Book, the Fed reported that while economic activity increased at a "moderate pace" in most of its 12 districts during the February through mid-April period that the report covers, firms continued to struggle with rising prices and a lack of available workers.

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Inflationary pressure remained "strong" over the past few months, the Beige Book reported, with widespread price increases in manufacturing, including steeper costs for raw materials, transportation and labor. Several districts also reported spikes in prices for energy, metals and agricultural commodities following the Russian invasion of Ukraine Feb. 24, while others noted the COVID-19 lockdown in China had exacerbated pandemic-induced disruptions in the global supply chain.

Workers unload shipments of food at Union Market in Washington, D.C, Feb. 9, 2022.  (Stefani Reynolds/AFP via Getty Images / Getty Images)

Many businesses said they were passing along the higher costs to customers. 

"Strong demand generally allowed firms to pass through input cost increases to customers, for example, via fuel surcharges for freight and airline fares," the report said. "However, contacts in a few districts noted negative sales impacts from rising prices. Firms in most districts expected inflationary pressures to continue over the coming months."

Businesses also said that hiring was held back by a lack of available workers, though firms in several districts reported signs of modest improvement in labor availability. It's a broader trend known as the "Great Resignation." Newly empowered workers are quitting their jobs in favor of better wages, working conditions and hours as businesses lure new workers with higher salaries. 

As a result, Americans' incomes are rising across the board as employers have ramped up hiring to offset the losses. However, some firms said the tight labor market and growing wages have worsened inflationary pressures. 

A man wearing a mask walks past the U.S. Federal Reserve building in Washington D.C., April 29, 2020.  (Xinhua/Liu Jie via Getty Images / Getty Images)

"Many firms reported significant turnover as workers left for higher wages and more flexible job schedules," the report said. "Persistent labor demand continued to fuel strong wage growth, particularly for footloose workers willing to change jobs. Firms reported that inflationary pressures were also contributing to higher wages, and that higher wages were doing little to alleviate widespread job vacancies."

The report comes as American consumers grapple with the hottest inflation in four decades, with the consumer price index soaring by 8.5% in March from the previous year. 

Gasoline prices hover around $4 per gallon for the least expensive grade at several gas stations in the nation’s capital April 11, 2022, in Washington, D.C.  (Chip Somodevilla/Getty Images / Getty Images)

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Rapidly rising prices have forced the Federal Reserve to take a more hawkish approach to fighting inflation. Policymakers raised rates by a quarter-percentage point in March and have since signaled support for a faster, half-percentage point increase at their May meeting.

Traders are now pricing in more than a 95% chance of a hefty half-point rate jump when policymakers meet next month.

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