By Lindsay (NYSE:LNN) Dunsmuir
(Reuters) -U.S. economic activity increased slightly from January through late February and inflation pressures remained widespread, but businesses reported a moderation in price increases that they expect to continue this year, the Federal Reserve said in a report on Wednesday.
The U.S. central bank released its latest temperature check on the state of the economy a day after Fed Chair Jerome Powell said policymakers may have to raise interest rates higher and possibly at a faster pace than anticipated following recent stronger-than-expected readings on the labor market, consumer spending and inflation.
The Fed raised rates last year at the fastest pace in 40 years in a bid to cool demand across the economy and bring inflation back down toward its 2% goal. But after some softening late last year, the economy has since rebounded and price increases have reaccelerated.
The Fed's survey, known as the "Beige Book," reflected recent data to a large extent, with economic activity picking up compared to late last year and the labor market described as "solid." But there were also hopeful signs, with supply chains easing further and price increases moderating in many of the Fed's regional districts.
"Looking ahead, contacts expected price increases to continue to moderate over the year," the report said.
There were also indications some consumers were balking at higher prices and companies were less able to expand profit margins than in previous months.
Contacts told the Chicago Fed, for example, that there was growing customer resistance to paying higher prices, while in the St. Louis Fed's district "firms, especially smaller ones, reported accepting tighter profit margins instead of increasing prices."
That said, inflation remained "widespread" according to the survey, and in the labor market "finding workers with desired skills or experience remained challenging."
TIGHT LABOR MARKET
Fed policymakers have been keeping a keen ear on feedback from business contacts around the country as they attempt to quash price pressures without tipping the economy into recession. The Fed's benchmark overnight interest rate is currently in the 4.50%-4.75% range.
By the Fed's preferred measure, inflation in January was running at a 5.4% annual rate and posted its largest monthly increase since June 2022.
Making the Fed's task even more difficult, job gains surged in January and the unemployment rate fell to the lowest reading since 1969. Fed policymakers have made clear that there would have to be some easing in labor market shortages in order for wage pressures to ease.
So far, labor availability has only improved slightly, the survey said, while the Dallas Fed reported that some small or rural school districts in Texas had transitioned to a four-day school week in part due to staffing shortages and the need to attract teachers. Overall wage pressures "generally increased at a moderate pace."
The U.S. Labor Department reported earlier on Wednesday that job openings fell less than expected in January and data for the prior month were revised higher, pointing to persistently tight labor market conditions.
The Labor Department is scheduled to release its closely-watched employment report for February on Friday.