Fed’s Beige Book shows signs of inflation slowing, but labor market remains tight

The rate of inflation slowed from earlier in the year, though it continued at a “modest to moderate pace” in December in the Federal Reserve’s 12 banking districts, according to the Fed’s latest Beige Book report.

The compilation of anecdotal evidence released Wednesday found that many retailers have had a harder time passing on cost increases as consumers have become more sensitive to prices, forcing some retailers to resort to discounts to move goods.

Meanwhile, manufacturers in many districts reported continued reductions in freight costs and prices for raw materials, including steel and lumber, though some said input costs remained high.

Looking ahead, prices across the country are expected to slow further, the report said.

Fed officials are watching the labor market closely for signs of a slowdown, given the link between a strong labor market and wage growth that has partially pushed inflation above their 2% target.

Beige Book data collected on or before Jan. 9 showed a strong labor market with companies continuing to struggle to fill vacancies and strong wage growth. Many companies were also hesitant to lay off workers even as demand for their goods and services slowed and planned to reduce workforces through attrition if necessary.

With the exception of New York, economic activity in all Fed districts remained broadly unchanged with slight or modest increases or decreases since the last report in late November. However, in New York City, the local economy contracted, led by a sharp decline in the manufacturing sector, which experienced its most widespread decline since the start of the pandemic. Most business partners do not expect activity to pick up in the coming months.

Officials will use this report to form the basis of their economic talks at their two-day policy meeting scheduled for January 31 and February. 1.

Some officials have hinted that a 0.25% rate hike makes sense at the next meeting, while others favor a 0.50% rate hike. In December, the Fed raised interest rates by 0.50%, bringing cumulative interest rate increases in 2022 to 4.25%.

A Federal Reserve Board of Governors sign is seen at the entrance to the William McChesney Martin Jr. Building ahead of a press conference by Federal Reserve Board Chairman Jerome Powell in Washington, U.S., Sept. 21, 2022. REUTERS /Kevin Lamarque

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