Many Businesses Expect to Raise Prices in Face of Higher Input Costs: Fed

A woman works at a packing station at the 855,000-square-foot Amazon fulfillment center in Staten Island, one of the five boroughs of New York City, on Feb. 5, 2019. Johannes Eisele/AFP via Getty Images

A number of U.S. businesses facing supply-crunch-driven inflation in input costs say they expect to pass on higher prices to consumers, according to the Federal Reserve.

Producer price inflation and its potential spillover onto store shelves is one the themes from the Fed’s most recent version of the “Beige Book,” released on Sept. 8, which provides an economic snapshot of the United States from early July through August, based on reporting from the central bank’s 12 districts.

Resource shortages were “pervasive” and input price pressures “widespread,” with many businesses reporting difficulty sourcing key inputs, even at greatly increased prices, the report says.

“Firms have continued to report exceptionally widespread increases in input prices—particularly in the construction, manufacturing, wholesale trade, and transportation and warehousing industries,” the report’s authors wrote, adding that contacts in all sectors expect widespread input price increases for the rest of the year.

Half of the districts described input price inflation as “strong,” while the other half characterized it as “moderate.”

In many cases, higher input costs are likely to translate into higher prices for consumers.

“A sizable share of contacts in all sectors plan to increase prices over the next six months,” the Beige Book authors wrote, adding that several of the 12 districts indicated that businesses expect “significant hikes” in their selling prices in the months ahead.

Adding fuel to the inflationary dynamic were upward price pressures on wages, with most businesses characterizing wage growth as “strong” as demand for workers continued to strengthen.

“All districts noted extensive labor shortages that were constraining employment and, in many cases, impending business activity,” the authors of the report wrote.

Increased worker turnover, a rise in early retirements, child care needs, and enhanced unemployment benefits were all noted as factors driving the hiring crunch, according to the report, with businesses resorting to more frequent raises, bonuses, training, and flexible work arrangements to attract and keep staff.

The Fed’s Beige Book also showed overall economic activity “downshifted slightly to a moderate pace” in the reporting period, with the softening mostly down to a pullback in dining out, travel, and tourism, mostly reflecting concern around the spread of the Delta variant.

Job openings in the United States have surged to a record high of 10.9 million, while hiring lagged that figure by more than 4 million, painting a picture of an economic recovery held back by businesses struggling to fill vacant positions.

There are now 2.5 million more job openings than unemployed people in the United States. The Labor Department’s most recent jobs report showed that the total number of unemployed people edged down to 8.4 million in August.

The disconnect between record-high job openings, the number of hires, and unemployment levels comes as pressure mounts on the Fed to trim its massive asset-buying program, a process known as tapering.

The Fed has been buying around $120 billion in monthly Treasury and mortgage securities, one of the crisis support measures for the economy that the central bank adopted in the face of the pandemic.

Federal Reserve Chairman Jerome Powell said at the Jackson Hole Symposium several weeks ago that central bank policymakers would need to see “substantial further progress” toward the Fed’s maximum employment goal as a prerequisite to start trimming asset purchases.

The Labor Department’s most recent jobs report, which showed U.S. employers creating far fewer jobs than expected, weakened the case for the Fed to move quickly to taper its bond-buying program, according to some analysts. But St. Louis Federal Reserve Bank President James Bullard told the Financial Times in an interview published Sept. 8 that the central bank should move forward with tapering, despite the job growth slowdown.

“There is plenty of demand for workers, and there are more job openings than there are unemployed workers,” Bullard told the outlet. “If we can get the workers matched up and bring the pandemic under better control, it certainly looks like we’ll have a very strong labor market going into next year.”

The Beige Book noted that job growth in all districts varied from “slight to strong,” with rising employment overall.