US Businesses Split on Inflation, Economy - Federal Reserve Beige Book

WASHINGTON (Pakistan Point News / Sputnik - 19th January, 2023) Businesses in the United States have mixed feelings about inflation and the US economy as the possibility of a recession lingers despite the strong rebound in activity from the effects of the coronavirus pandemic measures, the latest Beige Book compiled by the Federal Reserve's 12 regional banks said.

"(Some retailers) noted that high inflation continued to reduce consumers' purchasing power, particularly among low and moderate-income households," the Beige Book, which contains information collected on or before January 9, said.

The Fed noted that US economic activity was relatively flat at the start of the year and businesses were pessimistic about growth in the months ahead. Half of the Fed's 12 regional banks reported no change or slight declines in economic activity in their districts, with several others reporting slight or modest growth and one reporting a significant decline.

The Fed also said many businesses have acknowledged the difficulty of passing the higher costs to consumers, "suggesting greater price sensitivity on the part of consumers."

"Selling prices increased at a modest or moderate pace in most districts, though many said that the pace of increases had slowed from that of recent reporting periods," the Fed said.

Businesses are at a crossroads about the state of the US economy amid expectations that the Fed will execute its smallest interest rate hike in eight months on February 1. The US central bank had carried out a stream of successive interest rate increases in 2022.

Inflation, as indicated by the Consumer Price Index (CPI) rose by 6.5% in the 12 months to December, the Labor Department said last Thursday.

It was the slowest annual advance for the CPI since October 2021.

The CPI hit a 40-year high in June when it grew at an annual rate of 9.1%, versus the Fed's inflation target of just 2% per annum. In a bid to control surging prices, the Fed added 425 basis points to interest rates since March via seven rate hikes. Prior to that, interest rates peaked at just 25 basis points, as the central bank slashed them to nearly zero after the global COVID-19 outbreak in 2020. The Fed, which executed four back-to-back jumbo rate hikes of 75 basis points from June through November, imposed a more modest 50-basis point increase in December.

For the Fed's next decision on interest rates on February 1, economists expect the central bank to announce an even smaller hike of 25 basis points.

The last time the Fed announced a 25 basis-point increase was in March 2022, at the start of its current rate hike cycle.

US economic data has come in weaker than anticipated this week, in further testimony that the Fed's interest rate hikes were working.

The Fed said industrial production in the United States fell for a second month in a row in December amid lower factory output that suggested manufacturers were slowing activity based on a softening demand for goods.

Separately, the New York division of the Fed reported on Tuesday that its manufacturing survey posted a -32.9 reading for December, versus a forecast of -8.6% and -11.20 for November. It was the steepest monthly slide in manufacturing since September 2021.

The drop in industrial production and manufacturing coincided with US producer prices falling the most in nearly three years in December, after the sharpest tumble in a year in retail sales.