Inflation, Rising Wages Highlight Fed’s Latest Beige Book

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The latest Beige Book from the Federal Reserve paints a gray picture of the U.S. economy, with the COVID-19 delta variant and inflation continuing to hamstring businesses while wages and employment improve.

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The report, released by the Fed on Wednesday, noted that the nation’s economic growth “downshifted slightly to a moderate pace” in early July through August. Much of the slowdown is attributable to a pullback in dining out, travel and tourism as the rise of the delta variant created safety concerns and contributed to a few international travel restrictions.

The biggest ongoing trends centered on prices and employment. Inflation was “steady at an elevated pace” during the period, with half of the Fed’s 12 districts reporting strong price increases and half reporting moderate increases. Most districts reported “substantial escalation” in the cost of metals and metal-based products as well as freight and transportation services. Construction materials also carried much higher costs, with the exception of lumber, which has seen prices drop sharply from historically high levels earlier in the year.

The rise in costs, coupled with supply-chain constraints, continue to squeeze many businesses, which have responded by raising their own prices.

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“Even at greatly increased prices, many businesses reported having trouble sourcing key inputs,” the Fed wrote. “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.”

Meanwhile, all of the Fed’s districts reported a rise in overall employment, with the pace of job creation ranging from “slight” to “strong.” Demand for workers has come at a time of extreme labor shortages in many parts of the country, which the Fed said is “impeding business activity.” The labor shortages are mainly due to higher turnover, early retirements (especially involving healthcare jobs), childcare needs and enhanced unemployment benefits.

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A number of districts reported an “acceleration in wages,” with the Midwestern and Western regions seeing particularly strong wage growth. Lower-wage workers are the main beneficiaries of higher pay as employers offer more frequent raises as well as bonuses to attract and retain staff.

Those higher wages don’t necessarily mean stronger personal finances, however. As GOBankingRates reported last month, while workers have seen hourly wages tick higher, inflation might actually be giving them a net pay cut.

In June, average hourly wages rose 3.6% from the prior year to $30.40 — the largest increase since January 2009, according to the Economic Policy Institute. But data from the Bureau of Labor Statistics show that “real wages” — those adjusted for inflation — fell by almost 2% in July compared to 2020.

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