Easing Consumer Demand Stems Inflation
The U.S. economy showed signs of slowing in June and July, but labor markets were so tight that firms were forced to raise pay and find creative ways to attract workers, the Federal Reserve said Wednesday.
In a report that dimmed already fading prospects for higher interest rates, the Fed’s “beige book” report on economic conditions in the United States said easing consumer demand for goods and services appeared to be holding inflation in check.
It said energy costs, which have skyrocketed over the last year, may have peaked.
The beige book findings will be used when the Fed’s policymaking Federal Open Market Committee meets Aug. 22 to set interest rates.
The Fed has raised interest rates six times since June 1999 to rein in the booming economy, but analysts expect it to leave rates unchanged.
“The information collected for these reports suggests that economic activity in all Federal Reserve Districts continued to expand in June and July, but there were additional signs that the expansion was moderating in some sectors and the majority of districts,” the beige book said.
“Easing demand appears to be restraining price increases,” the Fed said, adding that companies seem to be absorbing the indirect costs of higher energy costs without passing them on to consumers “for the time being.”
But the Fed also said a severe scarcity of workers was “limiting growth of activity in some areas.”
Although Fed officials worry that a shortage of workers may spark inflation by forcing employers to bump up wages and benefits, the other signs of a slowdown will be welcome news for inflation-fighting central bankers.
Evidence has been mounting that huge gains in worker productivity are keeping inflation in check, even though the economy is still roaring ahead and unemployment--4% in July--is hovering near a 30-year low.
The Fed said loan demand appeared to be strong but some banks reported a decline in loan applications. Home building and buying also slowed, although both remained at “high levels.”
The San Francisco Fed said Washington state Internet sellers were finding it harder to get venture capital money.
A separate report Wednesday showed U.S. wholesalers’ stockpiles of goods increased in June for the 17th consecutive month, as businesses built up reserves in case the expected economic slowdown does not materialize.
The Commerce Department said U.S. wholesale inventories rose 1% in June, a stronger gain than the 0.4% forecast by economists in a Reuters poll. The rise followed a 1% gain in May, which was initially reported as a rise of 0.8%.
The stock-to-sales ratio--a measure of how long it would take to deplete inventories at the current sales pace--held steady at 1.29 months, historically a low level.
