Federal Reserve Beige Book Warns of "Fierce" Oil Prices: Half of Districts Face Strong or Intensifying Price Pressures, Businesses Confront Price Increases and Profit Squeeze

The latest Beige Book from the Federal Reserve shows that price pressures facing U.S. businesses are intensifying. Rising oil prices, leading to increased costs, have spread to multiple regions, with diesel surcharges being passed along supply chains. Tariffs, other commodity prices, and insurance costs are also continuously driving up business expenditures. Meanwhile, overall U.S. economic growth remains moderate, changes in the labor market are limited, and consumers are becoming increasingly sensitive to price increases.

On Wednesday, October 14 Eastern Time, the Federal Reserve released the Beige Book compiled from information collected up to October 5. The Beige Book shows that among the 12 regional Federal Reserve districts, half of the regions reported strong or intensifying price increases.

Of these, three regions saw strong overall price increases, while eight regions experienced moderate price growth, with three of these regions facing intensifying or already strong input cost pressures; one region reported moderate price growth. Four districts reported that the pace of price increases had accelerated compared to the last Beige Book report released on September 2.

This report illustrates the dilemma facing the U.S. economy: rising energy and other input costs are adding to inflationary pressures, but consumers’ resistance to price increases limits businesses’ ability to pass on costs. The coexistence of rising costs, squeezed profit margins, and differentiated demand may create even greater challenges for the Federal Reserve in controlling inflation while avoiding a further slowdown in economic growth.

Oil Price Shock Spreads Along the Supply Chain, Businesses Face a New Wave of Cost Pressures

Energy prices are a prominent risk reflected in this Beige Book. The Federal Reserve noted that all district reports mentioned the impact of rising oil prices, with businesses widely reporting high diesel prices and that fuel surcharges are passing new costs throughout the supply chain.

In addition to energy, businesses in multiple regions also reported ongoing price pressures from other bulk commodities, tariffs, and insurance costs. Some businesses expect that as existing contracts expire, input hedging arrangements end, and client delivery contracts require renegotiation, prices may continue to rise in the coming months.

This means the effects of higher energy prices are not limited to gas stations or the transportation industry. Rising transportation costs may gradually be transmitted to production, logistics, and end-consumer goods prices, while increases in other input costs further amplify operational pressures for businesses.

However, rising costs do not necessarily mean that businesses can fully raise prices. The Federal Reserve pointed out that profit margins at consumer-facing businesses are being squeezed and price-sensitive customers continue to resist price hikes. As a result, businesses have adopted selective price increases, targeted promotions, and adjustments to menus and product offerings in an attempt to balance cost control and sales volume.

This further complicates the inflation outlook: if businesses continue to absorb rising costs, profit margins may deteriorate further; if more businesses pass costs onto consumers, inflationary pressure may continue to expand.

Moderate Economic Growth, Manufacturing Remains the Main Pillar

Even as price pressures intensify, overall U.S. economic growth has not shown a significant acceleration. According to the Beige Book, since the previous report, out of the 12 regional Fed districts, two regions saw moderate economic growth, three saw slight growth, four experienced marginal growth, and three saw no significant change.

Manufacturing performed relatively well. In the Dallas Fed district, robust manufacturing growth led to moderate local economic expansion; six other regions also reported moderate to moderate-strong manufacturing activity. However, growth in other industries was limited overall, and most districts’ economic outlooks remained characterized by moderate growth, hampered by ongoing uncertainty.

The consumer side revealed a divergence. Most regions reported little change in overall consumer spending. Of the six regions reporting on auto sales, five saw flat or slightly declining sales. More than half of districts indicated that high-income households are the main drivers of consumer spending.

Even in Dallas, where retail sales remained solid, some businesses reported that low-income consumers have become more cautious with spending. Meanwhile, businesses in Boston, Minneapolis, and San Francisco reported a decline in spending by Canadian tourists.

This indicates that while some manufacturing activity is providing support, high oil prices and cost-of-living pressures continue to limit some households’ consumption ability, and economic growth has not yet developed broad and strong momentum.

Labor Market Maintains Low Hiring, Low Layoff Pattern; AI Investment Affects Labor Demand

The labor market as a whole has shown little change. According to the Federal Reserve, job levels in most districts were little changed or saw only small variations: three districts reported moderate job growth, four saw slight increases, and four saw no significant change.

Overall labor supply can meet demand, though shortages remain for specialist technical, technical, and skilled positions. On wages, five districts reported moderate wage growth, four regions indicated modest growth, and two saw only small increases; some regions also noted that inflation-driven cost-of-living adjustments and rising employee benefits costs are adding further wage pressures.

Of note, businesses in five regions said that after investing in artificial intelligence (AI) and boosting productivity, they have adjusted their labor demand through natural attrition, hiring delays, or anticipated reduction in new positions. In the Boston region, businesses also noted that employees’ willingness to seek new jobs increases when wage growth lags behind inflation.

Media have described the current labor market as a “low hiring, low layoff” environment. This means businesses have not yet resorted to large-scale layoffs, but are also not strongly inclined to hire, leading to a lack of vitality in the labor market. The impact of AI investment on labor demand has added a new variable to the employment outlook.

Inflation Data Combined with Beige Book Makes October Fed Policy Decisions More Challenging

The latest Beige Book comes as U.S. inflation data also adds new pressure for the Federal Reserve.

Earlier Wednesday, data from the U.S. Department of Labor showed that the U.S. Consumer Price Index (CPI) for September rose 3.7% year-over-year, higher than August’s 3.4% and the fastest increase in five months. Core CPI, excluding food and energy, rose 2.6% year-over-year, with both the headline and core CPI rising more than market expectations. Rising gasoline prices were a key driver of accelerated inflation, while price increases for software, toys, and other goods reflected the impact of AI-related demand and tariffs.

The Beige Book provides a different perspective: price pressures are not only reflected in official consumer price indices, but also in business procurement, transportation, insurance, and labor costs. In particular, the transmission of diesel prices and fuel surcharges indicates that energy shocks may continue to diffuse across supply chains; businesses’ concerns about renegotiating contracts after expiration highlight that cost pressures may not ease quickly.

Following the September CPI release, market expectations for a Fed rate hike at the October 27-28 meeting increased. According to CME’s FedWatch Tool, futures market pricing showed market participants raised the probability of an October rate hike from about 22% a day prior to nearly 35%, though over 60% still expect a pause at the October meeting, with nearly a 90% chance of at least a 25 basis point hike by December.

For the Federal Reserve, the challenge is that inflationary pressures are expanding, but economic activity and employment have not yet shown strong growth. If costs from energy, tariffs, and insurance continue to push up prices, relaxing policy too early could make it harder to bring down inflation; conversely, further tightening of monetary policy would raise financing costs for consumers and businesses, weighing further on already moderate economic growth.

The Beige Book does not mean the Fed will inevitably raise rates in October, but it reinforces one signal: the path to lower inflation may be more tortuous than expected, and the transmission of energy costs along supply chains will be a key factor to watch for future price trends.