Fed Beige Book: Labor Markets Tighter, Price Pressures Modest

By Sarah Chaney and Eric Morath Features Dow Jones Newswires

Labor markets tightened further, but price pressures were largely held in check, according to a new report from the Federal Reserve.

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"Labor markets tightened further for both low- and high-skilled positions, particularly in the construction and IT sectors," the Fed said Wednesday in its latest roundup of anecdotal information about regional economic conditions, known as the beige book. But price pressures had "eased slightly" in some districts as gasoline prices and dairy and crop costs fell.

The report was based on information collected in June across the central bank's 12 districts.

Broadly, the Fed said economic activity expanded at a slight to moderate pace in June. The Fed reported economic growth was modest in six districts, moderate in four districts and slight in two districts. Looking forward, many districts expect modest to moderate gains in the months ahead.

The report found that "wage pressures generally trended with employment conditions." A broad range of industries reported a shortage of qualified workers.

But wage pressure didn't appear to translate into stronger inflation.

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"Prices continued to rise modestly" across districts, with several reporting higher construction materials costs and increased home prices. Still, highway construction costs were lower than expected in Minnesota, the Federal Reserve Bank of Minneapolis reported. Elsewhere, restaurants and manufacturers reported price declines.

Fed Chairwoman Janet Yellen said in congressional testimony Wednesday it would be premature to judge that the economy wasn't on the path to 2% inflation over the next couple of years.

"We have seen increasing strength in the labor market that continues, and although there are lags in this process, I believe that's something that over time will put upward pressure on both wages and prices," Ms. Yellen said.

The Commerce Department reported the personal-consumption expenditures price index, the Fed's preferred inflation gauge, rose 1.4% in May from a year earlier. That was a slowdown from a 2.1% annual increase in February, the only month since 2012 the index's annual increase exceeded the Fed's 2% annual target for inflation. The Labor Department will report the June consumer-price index on Friday. Economists expect only a very modest increase from May for that inflation measure.

The beige book showed consumer spending to be rising across a majority of districts, led by increases in tourism and retail sales, outside of auto dealerships. The San Francisco Fed reported strong tourism demand despite "continued uncertainty surrounding immigration policy" that slowed international bookings at hotels in Southern California.

The next Fed policy meeting is July 25-26. At their meeting last month, officials raised interest rates for the third time in as many quarters to a range between 1% and 1.25% and penciled in one more rate increase this year.

Officials will also contemplate when to begin shrinking the Fed's $4.5 trillion balance sheet.

Several Fed officials said the central bank had sufficiently prepared markets to begin that process "within a couple of months," according to the minutes of the Fed's June policy meeting. Some others said waiting longer could offer more time to figure out why inflation has slowed in recent months.

The Fed's beige book report can be accessed here.

Write to Sarah Chaney at sarah.chaney@wsj.com and Eric Morath at eric.morath@wsj.com

(END) Dow Jones Newswires

July 12, 2017 14:42 ET (18:42 GMT)