“Districts noted that energy-related costs tied to the conflict in the Middle East were the primary driver of inflationary pressures, with spillovers into shipping, packaging, groceries, and fertiliser,” the Fed said in its “beige book” survey of economic conditions in the United States.
The United States and Israel launched the war on Iran on February 28, plunging the region into turmoil as Tehran’s retaliatory attacks hit Washington’s regional allies and virtually blocked the Strait of Hormuz.
The blockade of the vital waterway – which sees roughly a fifth of global oil and gas supplies pass through it under normal circumstances – has seen energy prices skyrocket and significantly disrupted supply chains.
The Fed’s beige book presents a national summary of information gathered by each of the US central bank’s 12 districts through interviews with key business contacts, economists and other sources.
The Fed’s preferred inflation measure rose in April by its highest year-on-year rate since 2023, US government data showed last month.
Wednesday’s report cited business owners as suggesting prices had not risen at a commensurate pace with non-labour inputs, suggesting companies were suppressing profit margins in order to maintain revenues.
Higher-income households continued to display resilient demand, in line with what economists have dubbed a “K-shaped economy,” where harsher economic conditions see richer families maintain or increase spending while hitting vulnerable households harder.
“Middle-income households were described as ‘squeezing more life out of every dollar before deciding to spend it,’ and low-income consumers showed greater financial strain,” the report said.
There was an overall increased usage of credit cards, fewer retail visits and stronger demand for necessities, as per the report.
Overall economic activity increased at a slight to moderate pace in 10 of the 12 Federal Reserve districts, while one reported a slight decline and another no change.
Employment activity showed little change across 11 districts, with one reporting modest growth.
“Manufacturing hiring was the strongest sector in several Districts, supported by defence-related activity and rising data centre demand,” the report said, in line with expectations given demand due to the war and the explosion of artificial intelligence technology.
“Most Districts described a low-hire, low-fire environment, with workers increasingly reluctant to change jobs because of economic uncertainty,” the Fed said. (AFP)
