Inflation pressures are building as the economy's quickening pace of expansion is starting to reach consumer prices, the Federal Reserve Board warned Wednesday in a report that reinforced economists' convictions that the central bank will soon boost interest rates again.
In another report, the Commerce Department announced that its index of leading economic indicators--the government's chief forecasting gauge of future economic activity--was unchanged in September after a strong advance the previous month.
The department also reported that orders to U.S. factories fell 0.2% in September, the second decline in the last three months and a dramatic turnaround from a 4.7% jump in August.
The Fed's latest summary of national economic activity, in its so-called beige book compiled after interviews with businessmen from coast to coast, suggests it may be difficult to bottle prices up much longer.
"Prices of raw and intermediate materials continue to rise, and there are increasing reports that manufacturers are passing along these costs by raising prices," the summary says.
"Most districts report no change in retail prices, although pressure is building in some districts," it says.
The survey was based on interviews conducted before Oct. 25 in all 12 Fed districts, and it updates the last one issued in mid-September. It will be used by the policy-setting Federal Open Market Committee when it meets Nov. 15 to consider again raising interest rates, as it is expected to do.
The latest Fed survey says much more bluntly that prices are on the rise, specifically citing increases at the raw and intermediate level of processing for chemicals, plastic, paper, steel and cotton.
Manufacturers are increasingly passing them on by raising their selling prices for finished goods, and that means retailers will probably do the same in a thriving economy if they calculate that consumers will keep buying.
"Economic activity continues to expand in all Federal Reserve districts," the Fed said. "There are signs of acceleration in the Chicago, Dallas, Minneapolis and Philadelphia districts, while growth has slowed somewhat in the New York district."
The San Francisco district reported that it is increasingly apparent that the California economy is growing modestly and that in the remainder of the district, economic conditions generally remain strong.
Though prices are rising, the Fed said there are still only a few reports of increasing wages, even though it is becoming difficult to find enough employees in some regions.
Consumer spending, which fuels two-thirds of national economic activity, was generally strong and auto sales were very strong. But some districts, including Atlanta, Cleveland, New York and Richmond, Va., said retail sales were not meeting their expectations.
One of relatively few signs of national weakening discovered by the Fed was in construction of single-family homes. Building activity was declining from fairly high levels earlier in the year in the face of higher mortgage rates.
Nonetheless, demand for bank loans was growing at a healthy pace across the country, the Fed said. Commercial and industrial lending was up solidly, though applications for home mortgages and refinancing continued to fall.
The index of leading indicators has advanced in 11 of the past 14 months. Index components that had a positive impact on the gauge in September included increased building permits, rising consumer expectations and fewer weekly initial claims for unemployment insurance. Stock prices also rose; there were slower business delivery times--usually a sign of rising orders--and business orders for plants and equipment were higher.
Four components pulled the index downward: declining factory orders for consumer goods, a lower money supply, the first decline in raw material prices in a year and fewer unfilled orders for durable goods.
Seasonally adjusted index, 1987=100 Sept. '94: 102.2
Source: Commerce Department