By Howard Schneider and Ann Saphir
WASHINGTON, July 10 (Reuters) - U.S. inflation "stepped up further this spring" as the evolving impact of tariffs, energy costs driven higher by conflict in the Middle East, and the booming buildout of artificial intelligence technology boosted price pressures that began building last year, the Federal Reserve said on Friday in a new report to Congress ahead of hearings on monetary policy next week.
"Inflation has risen this year and remains elevated relative to the
Federal Open Market Committee's longer-run objective of 2%," with the most recent data showing the U.S. central bank's preferred Personal Consumption Expenditures Price Index running about double that rate as of May, the report said.
By contrast, "the labor market has stabilized, with demand and supply roughly in balance," and the June unemployment rate of 4.2% still "low," the Fed report said while noting the shifting demographic trends that are helping keep it that way.
"A marked slowdown in immigration and ongoing declines in labor force participation due to the aging of the population led to a slowdown in labor supply growth," the document said.
It is the first monetary policy report to Congress issued under new Fed Chairman Kevin Warsh, who is set to appear before committees in the House of Representatives and Senate next Tuesday and Wednesday in what are supposed to be twice-a-year congressional reviews of monetary policy. The usual spring hearing was delayed amid controversy between former Fed Chair Jerome Powell and President Donald Trump, with Warsh taking over in late May after Powell's term as head of the central bank ended.
The Fed has held interest rates steady since December, but concerns about inflation have led investors to anticipate rate increases later this year.
The mention of AI as a driver of inflation, at least in the near term, is notable. Warsh has looked to the technology as a source of lower inflation given the likely boost it will give to productivity, but has lately acknowledged the timing of those productivity and supply-side gains is uncertain while the demand for electricity, chips and other materials involved in the buildout is continuing.
(Reporting by Howard Schneider; Editing by Paul Simao)
