MNI: Fed's Beige Book Points To Return To Pricing Normality

April’s Beige Book contained mixed messages about the likely direction of inflation at a time when the Federal Reserve is pushing back against expectations of a prompt commencement to its easing campaign, but Fed staff stressed to MNI that while the survey’s prominence has increased since Covid it remains a complement rather than a guide to FOMC policy setting.

The latest survey picked up on diminishing pricing power and expectations that cost increases will quicken, but was also peppered with signs of rising financial distress among low-income households and small businesses.

Four years after the start of the Covid outbreak, the signs from the Beige Book are that contract negotiations seem to have normalized, said Adrienne Slack, regional executive at the New Orleans branch of the Atlanta Fed, who spearheads engagement with a network of 3000 contacts.

"We’ve moved from an environment where the majority of businesses felt they had the ability to pass through cost increases to today, not everyone having the ability to do that. The competition has reentered the picture. More importantly supply chains disruptions have settled down in great measure,” she said.

POTENTIAL TURNING POINT

While staff at the 12 regional Fed banks have published Beige Book anecdotes two weeks ahead of each FOMC meeting for over four decades, these matter more to policymakers at a time when they are trying to identify potential turning points in the economy, such as a resurgence in inflation or a slide into recession.

The speed at which economic conditions shifted during the pandemic previously highlighted the value of the survey’s firsthand reports from businesses and community groups, when persistent complaints about unresolved supply chain bottlenecks presaged the jump in inflation that followed, Slack noted.

"Traditional data sources weren’t available -- they are delayed by their nature -- and the regional outreach program gave us a front row seat to what businesses were experiencing in real time,” she said in an interview on April 3.

In April’s Beige Book firms all over the country said their "ability to pass cost increases on to consumers had weakened considerably in recent months, resulting in smaller profit margins," though some were also heard to have found novel pricing strategies to charge more.

Richmond Fed President Thomas Barkin told Reuters this month local businesses are "finding ways to segment price hikes for different products targeted to low, middle and higher income consumers." That sort of thinking isn't everywhere, he said, but it's "in more places than I am comfortable with," raising questions about how fast disinflation will continue.

CRACKS EMERGING

But Fed staff cautioned in interviews that the Beige Book cannot be interpreted in the same way now that inflation has come off its peak. “Inflation still remains a top concern for businesses, but we’re not typically hearing about exorbitant lead times or delivery costs, just the overall input costs are still elevated," said Joe Mahon, regional outreach director at the Minneapolis Fed. Businesses, like consumers, tend to complain about high levels of prices even if the pace of price rises has slowed, he added.

The survey is better viewed as a mirror shining into all corners rather than a crystal ball on the economy, Mahon said.

"The Beige Book is created to be a complementary piece to the information that goes into policymaking,” he said. "There are issues arising that are worth calling attention to, even if they don't necessarily affect the FOMC's decision on the interest rate target."

Two-thirds of nonprofits surveyed by the Cleveland Fed reported low- and moderate-income households saw a decline in financial well-being in the past six months as higher prices strained budgets. St. Louis Fed contacts noted higher delinquencies on auto and small business loans.