The Federal Reserve is warning that rising energy costs tied to the conflict involving Iran are spreading through the U.S. economy, increasing pressure on businesses and consumers as higher fuel prices begin filtering into grocery bills, shipping costs, packaging expenses, and other everyday purchases.
The central bank's latest Beige Book survey, released Wednesday, portrays an economy that continues to grow across most regions but is increasingly confronting inflationary pressures linked to disruptions in global energy markets. The report comes as fighting in the Middle East and ongoing uncertainty surrounding the Strait of Hormuz continue to raise concerns about energy supplies and transportation costs worldwide.
Federal Reserve officials said businesses across the country consistently identified energy prices as one of the most significant challenges facing their operations.
In the report, the Fed noted that "energy-related costs tied to the conflict in the Middle East were the primary driver of inflationary pressures, with spillovers into shipping, packaging, groceries, and fertiliser."
That assessment highlights a familiar but powerful economic chain reaction. Higher oil and fuel prices increase transportation expenses, which in turn raise costs for manufacturers, distributors, retailers, and agricultural producers. Those increases eventually work their way into consumer prices, particularly in sectors where transportation and packaging represent a meaningful share of total costs.
The Beige Book, which gathers observations from businesses and economic contacts across the Federal Reserve's 12 districts, suggested many companies have so far resisted passing the full burden onto consumers. Instead, firms reported accepting narrower profit margins in an effort to preserve customer demand and remain competitive.
That strategy, however, may become increasingly difficult if elevated energy prices persist.
The findings arrive amid growing concern that inflation, which had shown signs of moderating over the past year, could reaccelerate. Government data released last month showed the Fed's preferred inflation gauge posted its strongest year-over-year increase since 2023. While multiple factors influence inflation trends, the central bank's latest survey points to geopolitical disruptions as an increasingly important contributor.
The conflict's economic impact is also revealing sharp differences among American households.
According to the report, higher-income consumers have largely maintained spending levels despite rising prices. Middle-income and lower-income households, by contrast, are becoming more cautious about discretionary purchases.
The Beige Book offered a particularly notable description of middle-class spending behavior, stating that consumers were "squeezing more life out of every dollar before deciding to spend it."
Businesses reported several trends that suggest households are becoming increasingly selective:
- Greater reliance on credit cards
- Reduced foot traffic at retail stores
- Stronger demand for necessities over discretionary purchases
- Increased focus on value-oriented spending decisions
Economists often describe this pattern as a "K-shaped" economy, where financial conditions diverge significantly depending on income levels. Wealthier consumers continue spending, while lower-income households experience growing financial strain.
The labor market, meanwhile, showed relatively limited movement. Employment levels remained largely stable across 11 of the Fed's 12 districts. The central bank characterized hiring conditions as a "low-hire, low-fire environment," reflecting widespread caution among both employers and workers.
Many employees appear reluctant to switch jobs amid economic uncertainty, while businesses remain hesitant to significantly expand payrolls despite continued growth.
One notable exception was manufacturing. The report identified factory hiring as one of the strongest areas of labor demand in several regions, driven partly by defense-related production and continued investment in artificial intelligence infrastructure, including data centers and advanced computing facilities.
