The Fed’s Beige Book released today had a few notable changes from previous books. The following sentence has not been seen in years: “Firms in some Districts noted an ability to increase selling prices”. Until now, that ability had been entirely absent in this cyclical expansion. The book also mentioned pressures on input prices in manufacturing, construction and transportation sectors. Labor markets were described as tight, such that there were more wage increases reported than in the previous Book six weeks ago. Economic growth was described as moderate in most Districts and businessmen were reported as optimistic about the 2018 outlook
The big news in this Book was that wage pressures are strengthening and that firms are starting to incorporate higher costs into their selling prices. Those anecdotal reports are consistent with signs of somewhat more inflation in the latest PPI, CPI and ISM releases. If the FOMC members pay any attention to this briefing book (and they apparently do) they should be less nervous about pushing the fed funds rate higher. Markets are not expecting a rate increase on Jan. 31, and that is probably still the most likely outcome from that meeting. Nevertheless, these reports of wage pressures and a degree of pricing power together with the exceptional momentum in equity prices could spark a spirited debate over the potential costs of moving too slowly toward a “normal” setting for the funds rate.