Author: smarttalksucce

U.S. businesses are experiencing escalating inflation that is being aggravated by a shortage of goods and likely will be passed onto consumers in many areas, the Federal Reserve reported Wednesday.

In its periodic “Beige Book” look at the nation’s economic picture, the central bank also reported that growth overall had “downshifted slightly to a moderate pace” amid rising public health concerns during the July-through-August period that the report covers.

“The deceleration in economic activity was largely attributable to a pullback in dining out, travel, and tourism in most Districts, reflecting safety concerns due to the rise of the Delta variant, and, in a few cases, international travel restrictions,” the report said.

Rising inflation pressures are part of that picture in which a shortage of workers is being met by higher salaries.

The report noted that inflation is “steady at an elevated pace,” with half the Fed’s 12 districts reporting “strong” pressure while the other half said it was “moderate.” However, the details of the report show that the issue is growing. The Fed’s preferred inflation gauge showed an increase of 3.6% in July, but most other measures are higher.

“With pervasive resource shortages, input price pressures continued to be widespread,” the report said.

Businesses reported “substantial escalation in the cost of metals and metal-based products, freight and transportation services, and construction materials,” though timber moved lower.

They also said the price pressures at the supply level likely will find their way to store shelves.

“Even at greatly increased prices, many businesses reported having trouble sourcing key inputs,” the report said. “Some Districts reported that businesses are finding it easier to pass along more cost increases through higher prices. Several Districts indicated that businesses anticipate significant hikes in their selling prices in the months ahead.”

The Beige Book release comes as the Fed debates whether to withdraw some of the extreme policy accommodation it has provided since the pandemic began. Specifically, officials are considering tapering monthly bond purchases, probably before the end of the year.

Those in favor of keeping policy in place worry primarily about the state of employment. The unemployment rate has fallen to 5.2%, but payroll growth slowed considerably in August amid fears over the Covid delta variant.

The Beige Book said all districts reported job growth, though it varied from “slight to strong.” Business contacts cited “extensive labor shortages” despite “strong” wage growth particularly among lower earners, the main area the Fed is targeting with a policy adjustment it approved a year ago.

“Employers were reported to be using more frequent raises, bonuses, training, and flexible work arrangements to attract and retain workers,” the report said.

Job offerings totaled a record 10.9 million in July, the Labor Department reported Wednesday. Hirings, though, were little changed as businesses deal with the labor shortage.

Now might be a good time for the Federal Reserve to start worrying about inflation.

August’s jobs report, besides being a big disappointment on the 235,000 headline number, also showed that even with weak hiring, wages are rising.

Average hourly earnings jumped 0.6% for the month, about double what Wall Street had been expecting, and the increase from a year ago stood at a robust 4.3%, up from a 4% rise a month ago. Even leisure and hospitality, which saw zero net job growth in August, saw wages jump 1.3% for the month and 10.3% on the year.

Those numbers come as the Fed is weighing when to start pulling back on the historically easy monetary policy in place since the early days of the Covid-19 pandemic. Some voices on Wall Street expect the wage and inflation numbers to start resonating with Fed officials.

“The 5.2% unemployment rate and rapidly rising wages suggest building inflationary pressure that will ultimately lead to more hawkish policy,” Citigroup economist Andrew Hollenhorst wrote in a detailed analysis of the current jobs situation.

While Fed officials mostly discuss the total payroll gains, Hollenhorst said he “would expect this rhetoric to shift a bit, perhaps at the September [Federal Open Market Committee] meeting, with more focus on the high level of job openings and increasing wages.”

Fed Chairman Jerome Powell went to great lengths in his annual speech in August during the central bank’s Jackson Hole symposium to knock down concerns about rising wage pressures as well as inflation overall, despite consistently higher numbers.

“Today we see little evidence of wage increases that might threaten excessive,” Powell said during the Aug. 27 speech. Measures Powell said he follows – he did not mention the Labor Department’s monthly average hourly earnings figure – point to “wages moving up at a pace that appears consistent with our longer-term inflation objective.”

One specific measure Powell mentioned was the Atlanta Fed’s Wage Growth Tracker.

That measure looks at wages on monthly and 12-month basis and then uses a three-month moving average to iron out distortions. On a smoothed level, the tracker is showing wages rising at a 3.7% pace, fairly consistent with the past few years. Without smoothing, the 12-month rate runs to 4.2%, which is the highest since 2007 and representative of how bumpy the data has gotten lately.

The Atlanta Fed will next update the tracker Friday, giving the Fed another look at potential pressures that could trigger a wage-price spiral, which economists consider “bad” inflation.

Fed officials thus far have attributed higher inflation numbers to supply issues. A continued rise in wages could signal that demand is becoming a factor.

“When it is difficult to disentangle demand from supply effects, price signals become more important to assess the extent of excess demand,” wrote Nomura chief economist Rob Subbaraman.

To be sure, there also is evidence that some of the issues that might spur inflation could abate ahead, particularly some of the supply chain issues Powell has cited.

The chairman also noted that unit labor costs remain low, meaning that companies still aren’t spending substantially more for productivity, which also could tamp down inflation.

“They’re taking a lot of solace in all these other factors,” said Mark Zandi, chief economist at Moody’s Analytics. “Inflation is on their radar screen, but it’s not blinking red, not even yellow.”

The rising wage numbers under most circumstances would be considered a positive.

However, the gains trailed the headline consumer price index growth of 5.4% in July and only matched the 3.6% increase when stripping out food and energy prices in July, the most recent month for which data is available.

Some central bank officials and economists worry that easy Fed policy is feeding inflation and starting to cause more harm than help. Rising home prices and high inflation expectations from consumers are fueling some of those fears.

“It is not surprising that a combination of doubling central bank assets over the past 18 months, massive fiscal stimulus, and a skill mismatch in the labor market has resulted in inflation rising to levels not seen in decades,” wrote Komal Sri-Kumar, president of Sri-Kumar Global Strategies. “Drilling a square peg into a round ole does not solve problems. It worsens it.”

Still, Zandi thinks Powell and the Fed will be content with allowing wages to rise for now.

“It’s not like they’re dismissing this as an issue. It’s a factor in their thinking about broader inflationary pressures,” he said. “But so far, they’d say the wage growth they’re observing is more a feature than a bug.”