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Fed Sees Moderate Inflation as Tight Job Market Boosts Wages
(Bloomberg) 08/03/2018

A tight U.S. labor market was helping lift wages across most of the country through late February and contributing to “moderate inflation” in most areas, a Federal Reserve survey showed.
The central bank’s Beige Book economic report, based on anecdotal information collected by the 12 regional Fed banks through Feb. 26, showed that the nation’s “modest to moderate” expansion was spreading the benefits of higher pay more widely. The survey also contained evidence that a pickup in inflation was more broadly based.
“Across the country, contacts observed persistent labor market tightness and brisk demand for qualified workers, as well as increased activity at staffing placement services,” according to the report, released Wednesday in Washington. “Most districts saw employers raise wages and expand benefit packages in response to tight labor market conditions.”
Prices increased in all districts, the survey stated, “and most reports noted moderate inflation.” The previous Beige Book report, released Jan. 17, noted that “most districts reported modest to moderate price growth.”
The report may add to expectations among investors that the central bank could end up raising interest rates in 2018 by more than the three quarter percentage-point moves that officials projected in December.
The rate-setting Federal Open Market Committee is scheduled to meet March 20-21, and investors widely expect the sixth increase since December 2015.
One of the Fed’s more dovish policy makers, Atlanta Fed President Raphael Bostic, said earlier Wednesday he had upgraded his own projection to three hikes this year, from two. Fed Governor Lael Brainard, another official who has argued a cautious approach to raising rates, said late Tuesday the economic outlook is improving and signaled support for continued gradual rate increases.
Material for the report was gathered before President Donald Trump announced plans for steel and aluminum import tariffs that have triggered fears of a trade war. Still, the report’s national summary mentions that “four districts saw a marked increase in steel prices, due in part to a decline in foreign competition.”
Trump signed a $1.5 trillion tax-cut bill into law on Dec. 22, a shot of fiscal stimulus that was noted in the Beige Book. “Contacts in a few districts conveyed reports of modest increases in compensation” following the tax cuts, according to the report, prepared by the San Francisco Fed.
Unemployment remained at 4.1 percent in January for the fourth straight month, the lowest level since 2000. Wages, however, haven’t risen as much as expected in response. Year-on-year gains in hourly earnings rose by an average 2.6 percent in the four most recent quarterly reports.

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