We Have Now Reached Phase 3…
Posted June 03, 2021
Let’s talk about the Fed’s latest Beige Book.
If you’re unfamiliar with the Fed’s Beige Book, it’s a report the Fed publishes eight times per year. In it, the 12 regional banks that comprise the Federal Reserve banking system (Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco), present anecdotal information on the U.S. economy.
You can think of the Beige Book as the Fed’s attempt at “outreach” through which it gives business contacts and others the ability to tell the Fed what they are experiencing in the real world.
We know from the last Beige Book release that the Fed is well aware that inflation is a MAJOR problem for the economy as the following statement from it reveals: “businesses in most sectors expect fairly widespread increases in the prices they pay in the months ahead…”
So, price pressures have increased even more from April. Supply chain issues are forcing costs higher. And for the first time in a LONG time, companies expect general consumer inflation to be even higher than the hikes firms are implementing in prices.
This final point is the most concerning.
As I’ve explained many times before, inflation arrives in stages. It’s not as though it appears overnight and suddenly the cost of everything rises.
Instead, inflation slowly works its way into the financial system in price hikes in the following prices.
1) Phase 1: The price of raw materials (what producers/manufactures pay for supplies)
2) Phase 2: Factory gate prices (what producers charge distributors/retailers).
3) Phase 3: Retail prices (what consumers pay).
The Fed’s latest Beige Book reveals that we are now well into the third phase. This is when inflation truly begins to get out of control.
The Fed now has a choice… begin to taper its QE program and tighten monetary policy or face an inflationary crisis.
I’ll detail which one the Fed will likely choose in tomorrow’s article. Until then…
Editor, Money & Crisis