Economy is tepid despite encouraging signs

There were some encouraging signs U.S. inflation pressures and labor shortages were easing, a Federal Reserve report showed last week, but economic activity was tepid as the central bank's actions weigh on growth.

Five of the Fed's districts reported slight or modest increases in overall economic activity over the last several weeks, while six noted no change or slight declines from the previous reporting period, and one cited a significant decline, the central bank said.

The Fed released its latest survey on the health of the economy derived from business contacts nationwide after a slew of recent data raised hopes that too-high inflation is on a sustainable path downwards, with wage increases moderating and a scramble for available workers lessening somewhat.

But that is twinned with the cost of such action as the Fed tries to dampen demand across the economy.

"On balance, contacts generally expected little growth in the months ahead," the Fed said in its survey, known as the "Beige Book."

U.S. retail sales fell by the most in a year in December, government data showed, putting consumer spending and the overall economy on a weaker growth path heading into 2023.

The Fed has raised interest rates over the past year at the fastest pace in 40 years in order to tamp down persistently high inflation but with progress finally being made, policymakers are growing increasingly confident they will reach a stopping point this spring with the policy rate around 5%.

But there was more positive news on inflation. Many Fed districts said that the pace of increases had slowed from that of recent reporting periods while almost half of all districts reported wage pressures had lessened.

"On balance, contacts across Districts said they expected future price growth to moderate further in the year ahead," according to the report.

That said, "while some districts noted that labor availability had increased, firms continued to report difficulty in filling open positions," the report noted.

By the Fed's preferred measure, inflation still remains almost three times the central bank's 2% target rate while U.S. job openings fell less than expected in November, with the labor market remaining tight.