Thursday, January 14, 2021

Federal Reserve Reports Prices Climbing Across the Country

The Federal Reserve Beige Book, formally known as the Summary of Commentary on Current Economic Conditions, is a qualitative review of economic conditions. 

It is published eight times each year before meetings held by the Fed's monetary policy-setting committee, the Federal Open Market Committee. 

It is a qualitative report. Each of the 12 regional Federal Reserve branches conducts interviews with local business leaders, economists, bankers in their region, and other market participants and contributes a chapter to the Beige Book. Each chapter is then divided into different sections. The report is published two weeks before each meeting of the FOMC.

The book outlines conditions of the national economy including things like the pace of local business activity as well as the employment and hiring conditions in each of the 12 different districts. It is considered an important snapshot glimpse of the economy.

The book was first compiled in 1970 and was called the Red Book up until 1983 when the color was changed to the more neutral beige color.

The most recent Beige Book was published Wednesday.

Most significant in this edition is the report of increasing prices across the country. From the summary:

Almost all Districts saw modest price increases since the last report, with growth in input prices continuing to outpace that of finished goods and services. Most notably, prices for construction and building materials, steel products, and shipping services were reported to have risen further. Contacts in several Districts noted an improved ability to raise final selling prices to consumers, especially in the retail, wholesale trade, and manufacturing sectors, and some cited plans to increase selling prices in coming months. Energy prices picked up in the reporting period but remained below pre-pandemic levels. Home prices continued to climb, driven by low inventories and rising construction costs.

From the Boston chapter:

A producer of cardboard boxes said that paper prices had increased after remaining flat for five years. Several contacts noted significant logistics issues both domestically and internationally, causing both higher prices and delays. Software and IT services contacts reported no changes in prices across the board, although one mentioned potentially restarting their annual increases in the next few months.

From New York:  

Businesses' input prices overall have continued to rise moderately, with contacts in the manufacturing, distribution, and construction sectors reporting substantial upward pressure on prices paid. Businesses in most sectors expect further increases in the prices they pay in the months ahead.

Selling prices have accelerated modestly, led by fairly widespread hikes among retailers, wholesale distributors, and manufacturers. Looking ahead, a rising proportion of businesses indicated plans to raise their selling prices in the next few months—most notably in the wholesale and manufacturing sectors.

From Philadelphia:

 Meanwhile, slight wage growth and modest inflation continued..

From Cleveland:

Nonlabor input costs also rose for many firms. Contacts from a variety of industries reported that shipping costs were up significantly because of capacity constraints. Construction firms said that costs for many materials were increasing, particularly those for steel, lumber, and some cement products. Manufacturers also noted rapidly rising steel prices, with one contact attributing the increase to supply chain disruptions and increasing global demand for steel products.
On balance, selling prices continued to rise modestly. Freight haulers said that exceptionally strong demand and limited capacity has allowed them to dictate terms to their customers, pushing shipping rates materially higher. Manufacturers also reported some success in pushing through price increases to cover rising input costs. In spite of softening demand, retailers and auto dealers said that prices firmed up in recent weeks because low inventories led to less discounting.

From Richmond:

 The Fifth District saw moderate price inflation since our last report. According to our most recent surveys, both manufacturing and service sector firms saw an acceleration in growth of prices received. Growth of prices paid for inputs increased moderately for service sector firms but slowed slightly for manufacturers. Inflation of prices paid outpaced that of prices received. Many firms reported rising costs of and longer lead times for raw materials, particularly those used in construction. 

From Atlanta:

Consistent with previous reports, input costs, particularly for lumber, aluminum, and steel, continued to rise notably. Transportation, shipping, and packaging costs increased as well. More contacts mentioned an ability to pass through increased costs to retailers and consumers. 

From Chicago:

 Wages rose modestly and prices were up slightly. Input costs increased modestly, driven by rising raw materials, energy, and shipping prices. Numerous manufacturing contacts noted large price increases for metals and metal products, particularly steel and aluminum.

From Minneapolis:

Agricultural conditions improved due to increased commodity prices and government aid.

 Most participants in a poll at a large transportation conference in early December expected freight pricing (excluding fuel surcharges) to increase faster than usual through early 2021. 

From Kansas City:

 Within manufacturing, prices for raw materials rose moderately while prices received for finished products grew slightly. Additionally, prices for raw materials were expected to continue to outpace selling prices in the coming months, putting pressure on profit margins. Retail prices increased moderately, with input prices rising slightly faster than selling prices. In contrast, contacts from the transportation and restaurant sectors indicated that selling prices rose faster than input prices in December, but expected that trend to reverse in upcoming months. Contacts in construction supply noted that selling prices rose modestly and expected them to continue to do so in following months.

From Dallas:

 Input costs continued to increase at a moderate pace overall, though retailers saw more substantial rises and several manufacturers noted sharply increased raw materials prices, particularly steel. Selling prices were flat to up slightly, with more marked increases reported in the retail and manufacturing sectors.

From San Francisco:

 Prices for building materials rose significantly, while those for agricultural products rose modestly.

Bottom line: Despite most branches reporting sluggish economic activity because of lockdowns and some prices declining or holding steady, there is a strong current of increasing prices. I expect this to continue and accelerate as we get further into 2021. Right now the inflation is percolating but it will spike at some point given the massive amount of money the Federal Reserve has pumped into the economy.

The key thing to note is that Fed members have no awareness of how quickly price inflation can spike from current levels.

In the EPJ Daily Alert, I am forecasting that price inflation will rapidly climb to 3.0% as measured by government price indexes, then 5% and possibly 10%.


1 comment:

  1. I just read an article from the New York Times titled 'The Most Important Thing Biden Can Learn From the Trump Economy.' Naturally the article was filled with the worst excesses of the Trump era fiscal and monetary policy. The article made the point that Trump was fiscally reckless passing tax cuts without the corresponding cuts to spending as well as the general increase in the budget on top of that. Not to mention the artifical lowering of the interest rate by the Fed starting back in 2019. Of course they take the completely wrong lessons from this. Essentially the article posits that because there was no high inflation during these years of low government interest rates and high deficits, Biden should take the lesson that we should spend more than ever. Essentially the consequences of the high inflationary period of the 70s and 80s are a thing of the past. They also claim that the high unemployment figures of the last 40 years versus the post war period are due to policy makers overall fear of high inflation and high deficits. The Trump era in the pre-pandemic economy is vindication for these leftist going forward with their preferred policy prescriptions (how convenient). Oh and just in case you were wondering, the cuts to regulation were not a crucial part in the economic expansion. It was just a 'sugar high that lead to unequal capital gains for corporations that would have crashed the economy anyway had it not been for the pandemic. So Biden is good to go on continuing to overregulate the economy. This is one of those articles to save for the future. I am curious though how Biden's team will handle the inflation especially if it gets out of hand. I somehow doubt that a Paul Volcker will come back in the picture to let inflation cool on the back of higher interest rates, especially since Biden wants to spend trillions on infrastructure, stimulus, and a public option. It could be even worse if Biden is somehow out of office by then and Harris is calling the shots. This could get ugly.