US firms nationwide complain trade disputes with China and others are boosting the prices of key inputs, while they continue to face widespread labor shortages, the Federal Reserve said Wednesday.
The ongoing difficulty in filling open positions at all skill levels and in every region is delaying projects and pressuring firms to raise wages or benefits – or even employ robots to ramp up production – according to the Fed’s latest ‘beige book’ survey of the economy.
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 at odds with the Fed
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.
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.
But even as the tariffs and the December tax cut could be adding to inflation, Trump once again attacked Fed Chairman Jerome Powell for raising interest rates.
In an interview in The Wall Street Journal on Tuesday, Trump said ahead of next month’s midterm congressional elections that the Fed posed the ‘biggest risk because I think interest rates are being raised too quickly.’ 
And he said companies complaining about rising costs were just trying to shift the blame, and denied any tariffs were in place – while simultaneously congratulating himself for their use to force countries to the negotiating table.
‘A business that’s doing badly always likes to blame Trump and the tariffs because it’s a good excuse for some incompetent guy that’s making $25 million a year,’ Trump said.
If inflation were to materialize, Trump said he would rather raise rates ‘slower and heavier, at a later date,’ precisely the scenario the Fed has said it wants to avoid so that it does not inadvertently trigger a recession by tightening too aggressively.
Widespread labor shortages
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.’
But with shortages of entry level and skilled workers, companies also have used non-salary options to attract and retain qualified workers, including signing bonuses, more flexible hours and added 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.
Combined with some disappointing earnings reports, that also cite rising costs, Wall Street took the news badly, sending the major indices down sharply following release of the Fed report.
The Dow closed with a 600-point loss, erasing all the gains for the year.