US firms face tariff-fueled price hikes, widespread labor shortages: Fed

While the reports from the Fed's regional banks reflected a healthy US economy, with "modest to moderate growth," President Donald Trump's aggressive tariff strategy, which has drawn retaliation from trading partners, is potentially adding fuel to inflation.

The central bank is watching price pressures closely to gauge how fast and how far to raise the benchmark lending rate, to allow the economy to continue to grow without an acceleration of inflation.

The Fed has raised the key interest rate three times this year and is widely expected to increase by another 0.25 percentage points in December.

"Manufacturers reported raising prices of finished goods out of necessity as costs of raw materials such as metals rose, which they attributed to tariffs," the Fed report said.

Some companies are not able to pass on cost increases to customers, and in Philadelphia, firms reported "difficulty meeting the prices of foreign competitors who are not exposed to tariffs on the primary input commodities of their products."

Trump has imposed steep tariffs on steel, aluminum and about $250 billion in imported goods from China, which has struck back with tariffs of its own on US goods.

- Widespread labor shortages -

Inflation has increased about two percent this year, in line with the Fed's target, but economists fear growing demand, combined with the tariffs and a labor shortage could ignite price increases.

The Fed said wages are only rose "modestly or moderately" in most of the country -- the San Francisco region was a notable exception -- but the increases were widespread throughout the United States.

One staffing firm in Philadelphia noted that "resistance to raising starting wages softened further among their clients after years of holding wages steady."

And companies also have used non-salary options to attract and retain qualified workers, including signing bonuses, flexible hours and more vacation.

The report included anecdotes of companies unable to expand or boost production because of a lack of workers at all levels.

One had a project delayed by six weeks because it could not find an elevator technician, while another company is another firm plans to add "cobots (or collaborative robots)" to increase production.

In Atlanta, "tightening labor markets, particularly among low-skill/ hourly jobs, were restraining business activity," but many regions cited lack of mid-level and highly skilled employees as well.

With stocks already lower for the day, Wall Street took the news badly, sending the major indices down sharply following the Fed report's release.