Fed warns oil price shock spreading through US supply chains, adding rate-hike pressure

Surging global oil prices driven by the Middle East war are spreading cost pressures across US supply chains, a new Federal Reserve report shows. Companies are grappling with rising energy and raw material costs on top of tariff burdens, yet fears of weakening consumer demand are preventing them from fully passing those costs on to buyers. The persistent inflationary trend is drawing fresh attention to whether the Fed will raise interest rates again.

In its October Beige Book released Wednesday (local time), the Fed said the effects of higher oil prices appeared in reports from all 12 districts. "Businesses reported that increased costs from high diesel prices and fuel surcharges are being passed through supply chains," it said.

The average US retail price of diesel surpassed $6.50 per gallon last month, hitting a record high. President Donald Trump announced Friday that he had reached an agreement with Russian President Vladimir Putin on the supply of Russian diesel, but the cost burden on businesses from elevated oil prices has continued.

Inflationary pressure was broadly confirmed across regions. Of the 12 Federal Reserve Bank districts, three reported strong price increases, eight saw moderate gains, and one edged up.

Notably, three of the eight districts with moderate price increases reported that cost pressures on businesses had intensified or were already running high. The Beige Book noted that contacts in multiple districts said upward price pressure from raw materials, tariffs and insurance premiums was also persisting.

Companies are also finding it difficult to pass higher costs on to consumers. With consumers reacting sensitively to price increases, businesses are limiting price hikes even at the cost of weaker profit margins.

In the labor market, signs emerged of declining demand for workers as AI spreads. Overall employment levels showed little change, but in five districts some companies reduced headcount or delayed new hiring, citing productivity gains from AI investment. Those firms also expected job creation to slow going forward.

The Beige Book reflects regional economic conditions gathered through Oct. 5. It serves as a key gauge of inflation and employment trends ahead of the Federal Open Market Committee meeting scheduled for Oct. 27-28.

The US consumer price index for September, also released Wednesday, rose 3.7 percent from a year earlier, exceeding market expectations. According to CME Group's FedWatch tool, interest rate futures markets are pricing in roughly a 35 percent chance the Fed will raise its benchmark rate this month.