The Federal Reserve reported Wednesday, July 15, that economic activity increased at a slight to moderate pace in 11 of the 12 Federal Reserve districts during late May and June, while one district reported no change. The finding came in the central bank’s latest Beige Book, released at 2:00 p.m. ET and based on information collected through July 6.

The line that matters is on prices.

Compared with the previous reporting period, price growth was the same or slower in every Federal Reserve district, the central bank said.

That is a reversal, not a nuance.

What Changed Since June

Six weeks ago, the picture was considerably worse. The June 3 Beige Book described prices rising at a moderate to strong pace, with most districts reporting higher inflation than in the previous report.

Businesses pointed to energy costs connected to the Middle East conflict as a major driver, with the pressure spreading into shipping, transportation, packaging, groceries, fertilizer and other raw materials. Nonlabor input costs were rising faster than many companies could increase their selling prices, squeezing profit margins.

Consumer-facing businesses were having the greatest difficulty passing those costs along.

Wednesday’s report said prices still increased moderately overall, but the direction improved. Nine districts described price growth as moderate, two described it as robust and one reported only slight growth.

Not one district reported that inflation accelerated compared with the previous Beige Book.

Some business contacts continued to attribute cost increases to the conflict in the Middle East, while others cited tariffs. Consumer prices were still rising, and several districts said customers had become more sensitive to price increases.

That creates a complicated environment for businesses: costs are no longer accelerating as quickly, but customers are also becoming less willing to absorb another round of price increases.

The Labor Market

Employment increased on balance.

Five districts reported modest, moderate or solid employment gains, while seven reported little or no change.

That describes a labor market that is neither collapsing nor overheating — approximately the balance the Federal Reserve wants as it evaluates whether inflation is moving sustainably toward its target.

The report also suggested that labor costs are not currently the primary source of inflation pressure. Nonlabor expenses, including energy, transportation and raw materials, remain the larger concern.

The One Issue Still Worrying Businesses

Fuel.

Business contacts generally expected the economy to continue expanding in the coming months, but several districts reported elevated uncertainty over future fuel costs.

That caveat is doing a great deal of work.

Agricultural operators in the Chicago district reported buying diesel in smaller quantities rather than purchasing it by the truckload because they were unwilling to commit at current prices.

Fertilizer costs were identified as an even greater concern heading into the fall and winter, when farmers begin locking in expenses for the next growing season. The report said a modest number of acres had been switched from corn to soybeans specifically because corn requires more fertilizer.

That is what geopolitical instability does to a business plan.

Companies are not only paying more. They are delaying purchases, changing production decisions and avoiding long-term commitments because they cannot reliably forecast what fuel and other energy-related costs will be several months from now.

Inflation Data Moves in the Right Direction

The Beige Book followed two significant inflation reports released over the previous two days.

On Tuesday, the Bureau of Labor Statistics reported that consumer prices fell 0.4 percent in June, the largest monthly decline since April 2020, while annual inflation cooled to 3.5 percent, below the 3.8 percent economists had expected.

On Wednesday morning, the Bureau of Labor Statistics reported that the Producer Price Index for final demand fell 0.3 percent in June, compared with expectations for no change.

The decline was driven by a 1.4 percent drop in final-demand goods prices, including a 6.4 percent decline in energy prices. Gasoline prices fell 12 percent, while diesel, jet fuel and crude petroleum prices also declined.

Services prices, however, increased 0.2 percent, showing that inflationary pressure has eased but has not disappeared.

Then the Beige Book arrived Wednesday afternoon and confirmed that price growth had either slowed or remained unchanged in all 12 districts.

John Williams, president of the Federal Reserve Bank of New York, said in a speech Wednesday morning that there were encouraging reasons to believe inflation had peaked. He projected that overall inflation would decline to approximately 3.25 percent by the end of the year before moving closer to the Federal Reserve’s 2 percent objective in 2027 and reaching the target in 2028.

Financial markets responded to the improving inflation picture. Expectations for a rate increase by September declined, while the two-year Treasury yield moved lower and risk assets, including Bitcoin, strengthened.

What the Federal Reserve Does With It

The Beige Book is published eight times each year, generally about two weeks before a Federal Reserve policy meeting. It provides policymakers with business-level information that may not yet appear in official economic statistics.

Federal Reserve Chairman Kevin Warsh will lead his second rate-setting meeting on July 28 and 29.

At the June meeting, policymakers raised their median 2026 inflation projection to 3.6 percent, up from 2.7 percent, and increased their median federal-funds-rate projection to 3.8 percent.

Minutes from that meeting showed officials divided over the appropriate path for interest rates. Some remained concerned that elevated inflation could require another increase, while others saw reasons to wait for additional information.

Warsh spent Tuesday and Wednesday testifying before Congress. He acknowledged that any central bank would welcome data moving in the right direction but stopped short of declaring the inflation fight finished.

That restraint is understandable. Much of June’s improvement came from declining energy prices during a relative lull in the conflict with Iran. Renewed hostilities and rising oil prices could reverse some of that relief before it becomes embedded in the broader economy.

What It Means for Business

For anyone operating a company, Wednesday’s Beige Book delivers three messages.

Input costs have stopped accelerating as quickly. Customers are watching prices more closely than before. And nobody knows with confidence what fuel costs will do next.

The first two developments offer relief. The third explains why the Federal Reserve is not declaring victory — and why businesses locking in transportation, agricultural or manufacturing contracts for the fall are still making a calculated bet rather than following a predictable plan.

JBizNews Desk | Washington
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