Key Takeaways:
The Federal Reserve's Beige Book showed inflation accelerating across most of the US, with 10 of 12 districts reporting faster price increases than in the prior period, driven by energy costs tied to the Middle East conflict. Economic activity expanded at a slight to moderate pace in 10 districts, while one reported a slight decline and another saw no change, according to the report published June 3.
"Higher fuel prices attributed to the conflict in the Middle East drove up transportation and shipping costs for businesses across most sectors," the San Francisco Fed said in its summary of the Twelfth District. A leisure and hospitality contact noted that eased hiring conditions made it possible to hire seasonal workers rather than rely on more costly overtime to meet labor needs.
Manufacturing activity strengthened in 9 of 12 districts, with demand supported by defense-related spending and data center construction. Employment was little changed in 11 districts, while wage growth remained modest to moderate. Consumer spending diverged sharply by income level, with higher-income households remaining resilient while lower-income consumers showed greater financial strain, the report showed.
The combination of rising inflation and flat employment complicates the Fed's policy path. With the fed funds rate at 5.25% to 5.5%, unchanged since July 2023, the central bank faces persistent price pressures that make rate cuts difficult to justify even as growth moderates. The next Federal Open Market Committee meeting is scheduled for June 16-17.
Inflation Spreads Beyond Energy
Price increases were not limited to fuel. Businesses across most sectors reported higher costs for transportation, shipping, and raw materials tied to tariffs. Food service companies faced higher prices for ingredients such as produce and animal products, while technology services, event staffing, and insurance costs also rose. Some businesses successfully pushed back against supplier cost increases, while others in transportation, hospitality, retail, and manufacturing passed increases on to customers in full or in part.
Most districts reported stronger price growth than in the previous Beige Book, with nonlabor input costs rising faster than selling prices, squeezing corporate margins. This dynamic is particularly acute for consumer-facing companies, which face growing affordability pressures among middle- and lower-income households.
Consumer Strain Deepens
The divergence in consumer health was a central theme. Higher-income households remained resilient and less sensitive to price increases, while middle-income consumers stretched budgets further before spending. Lower-income consumers showed the greatest strain, with reports of higher credit card use, fewer retail visits, and stronger demand for necessities such as food assistance and housing support.
Community organizations reported rising needs and reduced funding. Government funding changes led more individuals to drop insurance coverage, straining hospital resources. For nonprofit organizations, obtaining financial support from businesses became more difficult, and funding from public grants fell.
Manufacturing Emerges as Bright Spot
Manufacturing was the strongest sector, with 9 districts reporting modest to strong gains. Demand was supported by defense-related activity, data center buildouts, and customers seeking cost-saving investments in commercial vehicles and capital equipment. However, manufacturers continued to report cost increases for raw materials, energy, and shipping because of tariffs and higher global energy prices.
The outlook among business contacts remained weak, though slightly more optimistic than in the prior period. The persistence of energy-driven inflation, combined with tariff-related cost pressures, suggests the Fed may need to maintain its restrictive stance longer than markets had anticipated.
This article is for informational purposes only and does not constitute investment advice.
