Businesses and American households, already grappling with adjustments related to the Trump administration’s trade policy, are now bearing the brunt of soaring energy prices triggered by the conflict in Iran, a Federal Reserve report released on Wednesday reveals. Despite this, the document notes that economic activity progressed in most parts of the country in recent weeks and that employment remained stable.
“The conflict in the Middle East has been highlighted as a major source of uncertainty complicating hiring, pricing, and capital investment decisions, with many businesses adopting a wait-and-see stance,” stated the U.S. central bank in its latest “Beige Book”. This compilation of qualitative economic data from across the country helps decision-makers refine their understanding of the current situation and guide their interest rate decisions.
“Commercial outlooks differ amid widespread uncertainty about future conditions,” the report specifies. While contacts in the Boston and St. Louis districts expressed some optimism despite the war, a more pervasive pessimism dominates in other regions.
As relayed by a contact at the Kansas City Fed, households with low or moderate incomes “can no longer offset the weakness in wages, tariffs, and inflation in their budgets.” The Fed is expected to maintain its federal funds rate at the current range of 3.50% to 3.75% at its upcoming monetary policy meeting on April 28 and 29, with officials also adopting a “wait-and-see” approach.
Overall, price growth has “remained moderate in general,” as per the report, which drew on surveys and interviews conducted among business leaders and community organizations across the 12 Fed districts.
The increase in energy costs has translated into higher transportation expenses and elevated costs for plastics and fertilizers, the report underscores, adding that “pressure on input costs, in addition to energy-related increases, was also widespread.”
“Several manufacturers and retailers have raised their prices to cover the rise in input costs and tariffs previously absorbed,” reported the Cleveland Fed. “Some industrial firms have imposed surcharges on petroleum-derived inputs affected by the Middle East conflict.”
FRAYING CONSUMER RESILIENCE
The information in this latest report was collected until April 6 and reflects the unstable economic climate since Iran’s closure of the Strait of Hormuz disrupted about a fifth of global oil shipments and a third of fertilizer deliveries.
The average price of gas in the U.S. shot up to over $4 per gallon, retail diesel prices topped $5.60 per gallon, and fertilizer prices also saw significant increases.
The previous Beige Book, which signaled generally optimistic expectations for economic growth and a projected slowdown in the pace of price increases, was finalized before the recent hostilities in the Middle East on February 28.
Policymakers and analysts were surprised by households’ resilience in consumption despite a series of economic shocks, including post-pandemic inflation and last year’s tariff shock. However, the latest Beige Book shows signs of erosion.
A jeweler in Williamsburg, Virginia, shared with the Richmond Fed: “If they can save a dollar and get free delivery, they buy online… it’s my worst year so far.”
Manufacturing firms in the New York Fed district noted that increased uncertainty due to changes in tariff rates and the war “disrupted pricing schedules and made customers hesitant to commit to purchases.” Despite these headwinds, “some companies reported strong momentum,” nuanced the New York Fed.
INFLATION OUTLOOK
Fed officials generally claim to not consider temporary increases in raw material prices, with many still expecting inflation in goods resulting from last year’s tariff shocks to ease later this year, allowing for possible rate cuts to resume.
Meanwhile, inflation has remained above the Fed’s 2% target for over five years. Recent data suggest economists predicted a jump last month, not only in overall inflation but also in “core” inflation (excluding energy and food), which policymakers use to assess future inflationary pressures.
Officials largely view the U.S. labor market as stabilizing, with the slowing employment growth being balanced by a contraction in the labor force amid a significant drop in immigration.
The unemployment rate slightly declined last month to 4.3%.
The Beige Book highlights that wage competition has generally remained “subdued,” suggesting that the labor market is not fueling inflationary pressures. Several districts also noted minimal layoffs and low turnover, confirming that a job market characterized by few departures and hires remains the norm in much of the country.
There are also indications that artificial intelligence continues to reshape the employment landscape.
“A few contacts reported using generative AI tools to reduce costs and pause new hires,” San Francisco Fed relayed.
