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Americans are cutting back on discretionary spending as soaring fuel prices squeeze household budgets, the US Federal Reserve warned on Wednesday, highlighting the growing economic fallout from elevated energy costs ahead of its next monetary policy meeting later this month.
The Fed’s latest Beige Book, a survey of business conditions across its 12 regional districts, said consumer spending continued to grow modestly, but higher gasoline prices were increasingly forcing households to prioritise essential purchases over discretionary ones.
“Consumer spending edged up as higher prices, particularly for fuel, dampened sales in other categories,” the report said. Several districts reported consumers delaying purchases of non-essential goods or opting for cheaper alternatives as the cost of living remained elevated.
The findings come less than two weeks before the Federal Open Market Committee (FOMC) meets on July 28-29 to decide the future path of interest rates.
Despite the pressure on consumers, businesses and organisations generally remained optimistic about the economic outlook.
“Contacts generally expected the economy to continue to expand in the coming months,” the Fed said. However, it added that several districts flagged “elevated uncertainty in the outlook for fuel costs,” underlining the risk that persistent energy inflation could weigh further on growth.
Fuel prices have remained volatile this year following the conflict involving the United States, Israel and Iran, which disrupted global energy markets and threatened shipping through the Strait of Hormuz, one of the world’s most critical oil transit routes. Although oil prices eased briefly after a temporary lull in hostilities, renewed tensions have once again raised concerns over higher energy costs.
The Beige Book showed that inflationary pressures have moderated slightly but remain a challenge for businesses and consumers alike.
“Price growth was the same or slower in all districts” compared with the previous reporting period, the Fed said. Looking ahead, businesses offered mixed views on inflation, with some expecting price pressures to persist while others anticipated slower inflation partly due to lower fuel prices.
Businesses across industries continued to report rising costs for energy, transportation and raw materials.
“Some contacts tied these cost increases to the conflict in West Asia; others mentioned tariffs,” the report said.
Many companies also reported that rising operating costs were outpacing their ability to increase selling prices, resulting in pressure on profit margins. At the same time, businesses observed greater price sensitivity among customers, limiting their ability to pass on higher costs.
The labour market remained broadly resilient, with employment increasing modestly across most districts without triggering significant wage inflation.
The report suggested that hiring continued in several sectors, but employers remained cautious on pay increases despite workers seeking higher wages. In the St. Louis district, some businesses said they had not raised wages over the past three months even as employees requested salary hikes.
The Minneapolis district reported that elevated gasoline prices were hurting workers’ budgets while job seekers faced fewer employment opportunities across several occupations. However, hiring remained relatively stronger for positions such as nursing assistants, heavy machinery operators, stockers and customer service representatives.
The report reinforced recent comments from Fed officials that the labour market is no longer a major source of inflationary pressure, even as input costs remain elevated.
The survey also highlighted a temporary boost to local economies from the FIFA World Cup. Cities hosting matches, including Boston, Philadelphia, Miami, New York and Kansas City, reported stronger tourism activity, with hotels, restaurants and bars benefiting from increased visitor spending. Businesses in Boston said beer sales rose sharply during the tournament.
The Fed has kept interest rates elevated as it seeks to bring inflation back to its long-term target of 2 per cent. Although recent inflation data showed some moderation following an earlier decline in fuel prices, policymakers remain wary that renewed increases in oil prices could reverse recent progress.
Minutes of the Fed’s June policy meeting showed that roughly half of policymakers expect at least one more interest rate increase before the end of 2026 if inflation remains stubborn.
According to CME Group’s FedWatch Tool, financial markets expect the central bank to leave interest rates unchanged at this month’s meeting, while pricing in the possibility of another rate hike later this year, potentially in September, if inflationary pressures intensify.
The latest Beige Book underscores the delicate balancing act facing the Fed as it seeks to contain inflation without derailing economic growth. While businesses continue to expect the US economy to expand, rising fuel costs, geopolitical tensions and tariff-related price pressures remain key risks that could shape the central bank’s policy decisions in the months ahead.
With inputs from agencies.
