Evelyn Reynolds

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    Inflation Rose to 3.2%, but Overall Price Trends Are Encouraging

    Economists looked past the first acceleration in overall inflation in more than a year and saw signs that price pressures continued to moderate in July.Fresh inflation data offered the latest evidence that price increases were meaningfully cooling, good news for consumers and policymakers alike more than a year into the Federal Reserve’s campaign to slow the economy and wrestle cost increases back under control.The Consumer Price Index climbed 3.2 percent in July from a year earlier, according to a report released on Thursday. That was the first acceleration in 13 months, and followed a 3 percent reading in June.But that tick up requires context. Inflation was rapid in June last year and slightly slower the next month. That means that when this year’s numbers were measured against 2022 readings, June looked lower and July appeared higher than if the year-earlier figures had been more stable.Economists were more keenly focused on another figure: the “core” inflation index, which strips out volatile food and fuel prices. That picked up by 4.7 percent from last July, down from 4.8 percent in June. And on a monthly basis, core inflation roughly matched an encouragingly low pace from the previous month.The upshot was that inflation continued to show signs of seriously receding after two years of rapid price increases that have bedeviled policymakers and burdened shoppers — and the details of the July report offered positive hints for the future. Rent prices have been moderating, a trend that is expected to persist in coming months and that should help to weigh down inflation overall. An index that tracks services prices outside of housing is picking up only slowly.“This is continuing the kind of progress I think that you want to see,” said Omair Sharif, the founder of Inflation Insights, a research firm. Airfares fell sharply, and hotel costs eased last month. Big drops in those categories may be difficult to sustain but are helping to limit price increases for now.Used cars were also cheaper last month, a trend that some economists expect to intensify in the months ahead, based on declines that have already materialized in the wholesale market where dealers purchase cars. More

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    Italy’s Government Takes Aim at Taxi Shortages

    The government took steps this week to increase the supply of cabs after months of shortages, but critics say the problems with the industry run deeper.This summer, countless tourists, as well as residents of many top Italian destinations, found themselves in the fruitless pursuit of elusive game: a taxi.In Italy, where ride-sharing services like Uber, Lyft and Bolt have been met with strong resistance and are heavily restricted, social media sites channeled tirades describing hourslong taxi lines at train stations and airports. Callers to taxi dispatch numbers were put on hold for interminable waits. And regular taxi apps failed to find cars.Returning to Rome from Naples one Monday afternoon in June, a train trip that takes just over an hour, Daniele Renzoni said that he and his wife waited for more than an hour and a half at Termini station for a cab under a blazing sun.“Just image a long line of grumbling, frustrated people, complaining, cursing. Hot day, angry tourists, there’s not much else to say,” said Mr. Renzoni, who is retired. “Taxi drivers will tell you there’s too much traffic, too many requests, too much everything, but the fact is, the customer pays.”The situation is “a disgrace to Italy,” said Furio Truzzi, president of the consumer rights group Assoutenti, one of several associations that protested the shortage.Things got so bad that earlier this week the government intervened, introducing measures that would simplify procedures so that cities can issue new taxi licenses, including temporary ones to cover peak periods like the summer or major events like the Catholic Church’s Jubilee in 2025 and the Winter Olympics in Milan and Cortina d’Ampezzo in 2026.Major cities and those with international airports, like Rome, Milan and Naples, where the taxi crunch has been felt most keenly, will also be able to increase the number of licenses by 20 percent, though owners of the new permits must use electric or hybrid cars.In Rome, for example, there are now about 7,800 taxis, and if 20 percent more licenses were issued, there would be about 1,500 more. Parliament now has two months to convert the decree into law.But transportation experts said the decree falls far short of what they say is a needed overhaul of the industry, which holds outsized sway over local — and national — politics. Thanks to the taxi lobby, ride-sharing services are almost nonexistent in Italy, where Uber is the only platform in use, with many restrictions.The government lost an opportunity for real change, said Andrea Giuricin, a transportation economist at a research center at the University of Milan Bicocca. He said the best way to meet consumer needs would be to increase the number of licenses for Italy’s chauffeur services, known as N.C.C., which work with Uber.“It’s very difficult in Italy” because “there isn’t a culture of liberalization in general,” creating little opportunity for competition, said Professor Giuricin. Taxis “are a small but powerful lobby” that easily influences politics, “which is very weak” in Italy, he said.Taxis parked in the Piazza del Plebiscito in Naples during a strike last year. Taxi drivers are a powerful lobby, and ride-sharing services have only made timid inroads in Italy.Ciro Fusco/EPA, via ShutterstockAngela Stefania Bergantino, a professor of transportation economics at the University of Bari, pointed out that previous governments had tried to open up the taxi market. But they failed.“The problem is that taxis are regulated by municipal governments, which can find themselves captive in the sense that it is difficult for City Hall to implement policies that the cab lobby doesn’t like,” she said. “These are lobbies that have effective strike tools,” like wildcat strikes or traffic blockages that can paralyze entire cities, she said.Industry officials were dismissive of the new decree. “Much ado about nothing,” said Andrea Laguardia, director of Legacoop Produzione e Servizi, an association of taxi cooperatives. “The government presented these measures as crucial to resolving the taxi shortage,” he said, but city governments, which issue taxi licenses, could already issue more if warranted. The measures don’t “resolve the problem of urban mobility,” Mr. Laguardia said.According to a 2022 report by Italy’s transportation authority, Italy has roughly one taxi for every 2,000 people, fewer than other European countries like France or Spain.Italy’s competition watchdog said this month that it was also examining the industry.Representatives of drivers for chauffeur services, who have much to gain from any liberalization of the market, say they are being held hostage by the taxi lobby, even as the world becomes digital and a rebound in tourism increases demand.“We are losing out on rides because we can’t increase the number of cars on the road,” said Luigi Pacilli, the president of Federnoleggio, a group representing some N.C.C. drivers.“It’s a complete bluff,” he said of the new measures, which allow, but do not mandate, new licenses. Prime Minister Giorgia Meloni could shake things up, he said, “but I don’t know if she’ll have the will or desire to fight one of the strongest lobbies in Europe.”Taxi drivers say they are taking the hit for a plethora of problems: traffic in cities that slows cars to a snail’s pace, the surge in tourism after the pandemic’s peak and inefficient public transportation.“Let’s make local public transportation work well and then we can decide if more licenses are necessary,” said Loreno Bittarelli, the president of one of Italy’s largest taxi dispatch consortiums.The drivers say that critical shortages last only last a few months each year, and that demand slows to a standstill in winter. Adding new licenses would only stretch the winter fasting among more drivers.Above all, though licenses are issued by the city, they can then be sold by the drivers, for sums that can reach 250,000 euros, or about $276,000, depending on the city — a retirement nest egg for many. With an influx of new licenses, the value of an existing license would depreciate.City administrators fear cabbies could revolt and strike if the status quo changes. “If I decide to issue new licenses,” said Eugenio Patanè, Rome’s city councilor in charge of transportation, “I’m going to find 1,000 taxis blocking traffic in Piazza Venezia,” the downtown Rome square that taxi drivers habitually clog while protesting. More

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    July CPI report shows inflation gauge rose 3.2%, less than expected

    The consumer price index rose 3.2% from a year ago in July, a sign that inflation has lost at least some of its grip on the U.S. economy.
    Prices accelerated 0.2% for the month, in line with the Dow Jones estimate, the Bureau of Labor Statistics reported Thursday. However, the annual rate was slightly below the 3.3% forecast though higher than June.

    Excluding volatile food and energy prices so-called core CPI also increased 0.2% for the month, matching the estimate and equating to a 12-month rate of 4.7%, the lowest since October 2021. The annual rate for core also was slightly below a Dow Jones consensus estimate for 4.8%.
    Markets reacted positively to the report, with futures tied to the Dow Jones Industrial Average up nearly 200 points and Treasury yields mostly lower.
    Almost all of the monthly inflation increase came from shelter costs, which rose 0.4% and were up 7.7% from a year ago. The BLS said more than 90% of the increase came from that category, which accounts for about one-third of the CPI weighting.
    Food prices increased 0.2% on the month, and the BLS said energy increased just 0.1% even though crude prices surged during the month and prices at the pump jumped as well.
    Used vehicle prices declined 1.3% and medical care services were off 0.4%.

    The comparatively tame inflation levels helped raise worker pay. Real wages increased 0.3% on the month and were up 1.1% from a year ago, the BLS said in a separate release.
    The annual rate for headline inflation, while below expectations, actually marked an increase from the 3% level in June.
    Together, the latest batch of data shows that while inflation has come well off its 40-year highs of mid-2022, it is still considerably above the 2% level where the Federal Reserve would like to see it and high enough that cuts in interest rates are unlikely anytime soon.
    “While inflation is moving in the right direction, the still-elevated level suggests that the Fed is some distance from cutting rates,” said Seema Shah, chief global strategist at Principal Asset Management. “Indeed, disinflation is unlikely to be smooth and will require some additional economic pain before the 2% target comes sustainably into view.”
    Decelerating levels, though, are at least taking some of the pressure off the Fed to keep tightening policy.
    After hiking benchmark interest rates 11 times since March 2022, central bank officials are widely expected to take a break in September. However, it’s up for debate what happens from there, and public statements from policymakers have shown disparate opinions.
    Earlier this week, regional Fed presidents John Williams of New York and Patrick Harker of Philadelphia made comments indicating they could see the rate hikes at an end. However, Governor Michelle Bowman said she expects more increases, while fellow Governor Christopher Waller also has pointed towards the possible need for additional hikes ahead.
    Regardless of whether the Fed approves any additional hikes, virtually all members have agreed that the higher rates are likely to stay in place for some time.
    The higher rates have yet to put a dent in economic growth: The first half of 2023 has seen GDP post gains of 2% and 2.4% in the first two quarters respectively, and the Atlanta Fed is tracking third-quarter growth of 4.1%. Payroll gains have been slowing but are still solid, and unemployment is near its lowest since late in 1969.
    Consumers have begun to be a bit stretched and increasingly are turning to credit cards and savings for their spending. Total credit card debt surpassed $1 trillion for the first time this year, according to New York Fed data.
    However, more economists are beginning to expect the U.S. can avoid a recession despite the aggressive rate hikes. Bank of America, Goldman Sachs and JPMorgan Chase all recently have forecast that a contraction is becoming less likely. More

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    Interest rates should stay around 5% for longer — even as inflation falls, top economist Jim O’Neill says

    The U.S. Federal Reserve is broadly expected to raise interest rates by another 25 basis points at its next policy meeting in September, but market pricing suggests the central bank will begin cutting in 2024, according to the CME Group’s FedWatch tool.
    “We should be keeping rates around the 5% area in most of the developed world, because they should have some sort of positive relation to the level of inflation, if we want it to be permanently stable,” O’Neill said.

    Jim O’Neill, former chief economist Goldman Sachs Group, in Italy in 2019.
    Alessia Pierdomenico | Bloomberg via Getty Images

    Veteran economist Jim O’Neill says central banks will need to keep interest rates up around 5% across major economies for longer than the market expects, even as inflation subsides.
    The U.S. Federal Reserve is broadly expected to raise interest rates by another 25 basis points at its next policy meeting in September, but market pricing suggests that the central bank will begin cutting in 2024, according to the CME Group’s FedWatch tool.

    Traders will be closely watching the U.S. consumer price index reading later for July on Thursday for indications on the Fed’s future rate trajectory.
    Economists expect the Thursday headline CPI to come in at 0.2% month-on-month and 3.3% annually, according to a Dow Jones consensus estimate. While this marks a modest increase from June as a result of higher gas prices, it is well below the four-decade high of an annual 8.5% notched a year go.

    Core inflation, which excludes volatile food and energy, has remained sticky and is expected to come in at 4.8% year-on-year in July. The core reading has also remained consistently well above target in the euro zone and the U.K., prompting central bankers to reiterate their commitments to keeping rates high for as long as necessary to bring inflation towards their 2% targets.
    Policymakers have largely pushed back on rate cut expectations, and O’Neill, senior adviser at Chatham House and former chair of Goldman Sachs Asset Management, agreed that decreases were likely a long way off.
    “I have to say in order to deal with the challenge of core inflation coming down and with it the whole overhang of all the stimulus that’s accumulated over the past decade plus, I think that’s right,” he told CNBC’s “Squawk Box Europe.”

    “I don’t quite get this view that rates have to automatically start coming back down again in order to have a permanently more balanced world, in my view, economically. We should be keeping rates around the 5% area in most of the developed world, because they should have some sort of positive relation to the level of inflation if we want it to be permanently stable.”
    O’Neill also suggested the U.S. is “in a decent position to avoid a recession,” noting that inflation expectations have remained fairly stable.
    “Given that some of the forces that the Fed has been fighting are starting to fade, I think it’s reasonable that certainly this mood and this response of markets is perhaps going to continue for a bit longer,” he said.
    “I do think the trend on inflation is improving. In fact, I think the next twist is probably going to be more good news for Europe rather than the U.S. because we’ve had a lot in the U.S. recently and it’s just sort of started in Europe.” More

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    Biden Orders Ban on New Investments in China’s Sensitive High-Tech Industries

    The new limits, aimed at preventing American help to Beijing as it modernizes its military, escalate a conflict between the world’s two largest economies.President Biden escalated his confrontation with China on Wednesday by signing an executive order banning new American investment in key technology industries that could be used to enhance Beijing’s military capabilities, the latest in a series of moves putting more distance between the world’s two largest economies.The order will prohibit venture capital and private equity firms from pumping more money into Chinese efforts to develop semiconductors and other microelectronics, quantum computers and certain artificial intelligence applications. Administration officials stressed that the move was tailored to guard national security, but China is likely to see it as part of a wider campaign to contain its rise.“The Biden administration is committed to keeping America safe and defending America’s national security through appropriately protecting technologies that are critical to the next generation of military innovation,” the Treasury Department said in a statement. The statement emphasized that the executive order was a “narrowly targeted action” complementing existing export controls and that the administration maintained its “longstanding commitment to open investment.”Narrow or not, the new order comes at perhaps the most fraught moment in the U.S.-China relationship since President Richard M. Nixon and Secretary of State Henry A. Kissinger opened a dialogue with Beijing in the early 1970s. A series of expanding export controls on key technologies to China has already triggered retaliation from Beijing, which recently announced the cutoff of metals like gallium that are critical for the Pentagon’s own supply chain.Mr. Biden has stressed that he wants to stabilize relations with China following a Cold War-style standoff over a spy balloon shot down after crossing through American airspace and the discovery of a broad Chinese effort to put malware into power grids and communications systems. He has sent Secretary of State Antony J. Blinken, Treasury Secretary Janet L. Yellen and other officials to renew talks with Chinese officials in recent months. Gina Raimondo, the commerce secretary, is expected to go to China in coming weeks.Indeed, the president seemed intent on not antagonizing Beijing with Wednesday’s order, making no comment about his action and leaving it to be announced through written material and background briefings by aides who declined to be identified.Still, China declared that it was “very disappointed” by the order, which it said was designed to “politicize and weaponize trade,” and it hinted at retaliation.“The latest investment restrictions will seriously undermine the interests of Chinese and American companies and investors, hinder the normal business cooperation between the two countries and lower the confidence of the international community in the U.S. business environment,” Liu Pengyu, a spokesman for the Chinese embassy, said in a statement.Administration officials said the president’s order is part of their effort to “de-risk” the relationship with China but not to “decouple” from it. Wednesday’s announcement, though, takes that effort to a new level. While export bans and concerns about Chinese investment in the United States have a long history, the United States has never before attempted such limits on the flow of investment into China.In fact, for the past few decades, the United States has encouraged American investors to deepen their ties in the Chinese economy, viewing that as a way to expand the web of interdependencies between the two countries that would gradually integrate Beijing into the Western economy and force it to play by Western rules.U.S. government reviews in recent years, however, concluded that investments in new technologies and joint ventures were fueling China’s military and its intelligence-collection capabilities, even if indirectly. American officials have been actively sharing intelligence reports with allies to make the case that Western investment is key to China’s military modernization plans — especially in space, cyberspace and the kind of computer power that would be needed to break Western encryption of critical communications.Administration officials cast the effort as one motivated entirely by national security concerns, not an attempt to gain economic advantage. But the order itself describes how difficult it is to separate the two, referring to China’s moves to “eliminate barriers between civilian and commercial sectors and military and defense industrial sectors.’’ It describes China’s focus on “acquiring and diverting the world’s cutting-edge technologies, for the purpose of achieving military dominance.”(The text of Mr. Biden’s order refers only to “countries of concern,” though an annex limits those to “the People’s Republic of China” and its two special administrative areas, Hong Kong and Macau.)Mr. Biden and his aides discussed joint efforts to limit high-tech investment with their counterparts at the recent Group of 7 summit meeting in Hiroshima, Japan. Several allies, including Britain and the European Union, have publicly indicated that they may follow suit. The outreach to other powers underscores that a U.S. ban may not be that effective by itself and would work only in conjunction with other major nations, including Japan and South Korea.The executive order, which also requires firms to notify the government of certain investments, coincides with a bipartisan effort in Congress to impose similar limits. An amendment along those lines by Senators Bob Casey, Democrat of Pennsylvania, and John Cornyn, Republican of Texas, was added to the Senate version of the annual defense authorization bill.Several Republicans criticized the president’s order as too little, too late and “riddled with loopholes,” as Senator Marco Rubio, Republican of Florida and vice chairman of the Senate Intelligence Committee, put it.“It is long overdue, but the Biden administration finally recognized there is a serious problem with U.S. dollars funding China’s rise at our expense,” Mr. Rubio said. “However, this narrowly tailored proposal is almost laughable.”Representative Michael McCaul, Republican of Texas and chairman of the House Foreign Relations Committee, said the new order should go after existing investments as well as sectors like biotechnology and energy.“We need to stop the flow of American dollars and know-how supporting” China’s military and surveillance apparatus “rather than solely pursuing half measures that are taking too long to develop and go into effect,” Mr. McCaul said.The United States already prohibits or restricts the export of certain technologies and products to China. The new order effectively means that American money, expertise and prestige cannot be used to help China to develop its own versions of what it cannot buy from American companies.It was unclear how much money would be affected. American investors have already pulled back dramatically over the past two years. Venture capital investment in China has plummeted from a high of $43.8 billion in the last quarter of 2021 to $10.5 billion in the second quarter of this year, according to PitchBook, which tracks such trends. But the latest order could have a chilling effect on investment beyond the specific industries at stake.In a capital where the goal of opposing China is one of the few areas of bipartisan agreement, the only sounds of caution in Washington came from the business community. While trade groups praised the administration for consulting them, there was concern that the downward spiral in relations could speed a broader break between the world’s two largest economies.“We hope the final rules allow U.S. chip firms to compete on a level playing field and access key global markets, including China, to promote the long-term strength of the U.S. semiconductor industry and our ability to out-innovate global competitors,” the Semiconductor Industry Association said in a statement.Gabriel Wildau, a managing director at the consulting firm Teneo who focuses on political risk in China, said the direct effect of the executive order would be modest, given its limited scope, but that disclosure requirements embedded in the order could have a chilling effect.“Politicians increasingly regard corporate investments in China as a form of collusion with a foreign enemy, even when there is no allegation of illegality,” he said.The Treasury Department, which has already consulted with American executives about the forthcoming order, will begin formally taking comments before drafting rules to be put in place next year. But American firms may alter their investment strategies even before the rules take effect, knowing that they are coming.A series of expanding export controls on key technologies to China has already triggered retaliation from Beijing.Florence Lo/ReutersChina’s own investment restrictions are broader than the new American rules — they apply to all outbound investments, not just those in the United States. And they reflect a technology policy that in some ways is the opposite of the new American restrictions.China discouraged or halted most low-tech outbound investments, like purchases of real estate or even European soccer clubs. But China allowed and even encouraged further acquisitions of businesses with technologies that could offer geopolitical advantages, including investments in overseas businesses involved in aircraft production, robotics, artificial intelligence and heavy manufacturing.The latest move from Washington comes at a rare moment of vulnerability for the Chinese economy. Consumer prices in China, after barely rising for the previous several months, fell in July for the first time in more than two years, the country’s National Bureau of Statistics announced on Wednesday.While Chinese cities and some businesses have declared 2023 a “Year ›of Investing in China” in hopes of a post-Covid revival of their local economies, President Xi Jinping has created an environment that has made many American venture capital firms and other investors more cautious.Western companies that assess investment risk, like the Mintz Group, have been investigated and in some cases their offices have been raided. A Japanese executive was accused of espionage, and a new anti-espionage law has raised fears that ordinary business activities would be viewed by China as spying.The Biden administration’s previous moves to restrain sensitive economic relationships have taken a toll. China’s telecommunications champion, Huawei, has been almost completely blocked from the U.S. market, and American allies, starting with Australia, are ripping Huawei equipment out of their networks. China Telecom was banned by the Federal Communications Commission, which said it “is subject to exploitation, influence and control by the Chinese government.”At the same time, the United States — with the somewhat reluctant help of the Dutch government, Japan and South Korea — has gone to extraordinary lengths to prevent China from building up its own domestic capability to manufacture the most high-end microelectronics by itself.Washington has banned the export of the multimillion-dollar lithography equipment used to produce chips in hopes of limiting China’s progress while the United States tries to restore its own semiconductor industry. Taken together, it is an unprecedented effort to slow an adversary’s capabilities while speeding America’s own investment.Keith Bradsher More

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    Thursday’s inflation data may be low, but don’t expect the Fed to declare ‘mission accomplished’ yet

    The closely watched consumer price index is forecast to show a monthly increase of 0.2% for July and a 12-month rate of just 3.3%.
    But history has shown that inflation is stubborn and can last longer than expected once it becomes elevated.
    Former Fed Governor Richard Clarida told CNBC that central bankers “don’t want to declare ‘mission accomplished’ too soon.”
    Breaking down Thursday’s CPI report could end up being more about the details than what the headline numbers say.

    Gas station signboards display prices in Bethesda, Maryland on August 6, 2023.
    Mandel Ngan | AFP | Getty Images

    Thursday’s consumer price index report likely will show that the pace of price increases is easing, but not enough to get the Federal Reserve to retreat on its inflation fight.
    If the Wall Street consensus as gauged by Dow Jones is correct, the closely watched consumer price index will show a monthly increase of 0.2% for July and a 12-month rate of just 3.3%.

    The latter number pales in comparison to the 8.5% annual rate that the CPI registered a year ago, a reading that was just off the highest level in more than 40 years. Excluding food and energy, the monthly estimate also is 0.2%, though the 12-month rate is being put at 4.8%.
    If that all sounds like at least marginally good news, it is. Multiple data points have indicated that inflationary pressures have eased considerably from their 2022 levels.

    But history has shown that inflation is stubborn and can last longer than expected once it becomes elevated and entrenched. And the current round is still making an impact on consumers, evidenced by the CPI’s nearly 19% rise since bottoming in April 2020 during the early days of the Covid pandemic.
    “We can feel confident that inflation is moving in the right direction,” said Mark Zandi, chief economist at Moody’s Analytics. “But I don’t think we should be overly confident.”
    Zandi goes along with the consensus on the CPI estimate and sees inflation moving lower, perhaps even meeting the Federal Reserve’s 2% annual target around this time in 2024.

    For instance, housing-related costs, which make up about one-third of the inflation index weighting, are dropping. There also are signs that wage gains are abating. The employment cost index, a key Fed inflation measure, showed a 4.6% increase in the second quarter, down from an all-time peak of 5.7% from the same period in 2022, according to a data set that goes back to 2002.

    But Zandi also sees danger signs: Health insurance costs, for instance, are expected to start climbing now that a statistical adjustment the Bureau of Labor Statistics uses expires. That adjustment has caused the health insurance component of the CPI to show a 24.9% slide over the past year that now should reverse.
    Also, gas prices have soared this summer as the cost of U.S. crude jumped nearly 16% in July.
    A gallon of regular unleaded now costs $3.82 on the national average, up more than 8%, or nearly 30 cents a gallon, from the same time in July, according to AAA.

    Stock chart icon

    Oil price on the rise

    Still, Zandi thinks that, at the very least, the recent trends should convince the Federal Reserve to stop raising interest rates.
    “If inflation sticks to the script, that’s enough to convince the [rate-setting Federal Open Market Committee] at least in aggregate not to raise rates any further,” he said. “The bar for lowering rates, though is high, because inflation is not benign and still above target. They will wait until they’re absolutely sure that inflation is going to get back to target before they start cutting rates.”

    No ‘mission accomplished’ yet

    Former Fed Governor Richard Clarida isn’t so sure the Fed should end its current rate-hiking cycle, which began in March 2022 and has seen 11 increases worth 5.25 percentage points.
    Now a global economic advisor for asset management giant Pimco, Clarida said his former colleagues need to send the message that they’re continuing the inflation fight.
    “They’ll want to keep their options open. In particular, they don’t want to declare ‘mission accomplished’ too soon,” he said Wednesday during an interview on CNBC’s “Squawk on the Street.” “But they also can’t be tone-deaf. They need to acknowledge the data is improving.”

    At the macro level, the Fed rate hikes have appeared to do minimal damage. After declining in the first two quarters of 2022, GDP hasn’t been negative since and is tracking at a 4.1% annualized growth rate in the third quarter, according to the Atlanta Fed.
    Americans, though, remain largely dissatisfied with the state of the economy and have punished President Joe Biden with an anemic approval rating of just 39% in the latest CNBC All-America Economic Survey in July.
    That’s because damage from the elevated inflation levels and the rate hikes are often felt more in the micro economy, such as small businesses and household debt levels.
    “A lot of people rely on both credit card and home equity lending to make it all happen when they’re launching a small business, and credit card interest rates have actually been increasing slightly faster than fed funds,” the central bank’s key interest rate, said Patrick Reilly, co-founder of Uplinq, a global credit assessment platform for small business lending. “Banks have been tightening credit criteria as well.”
    Reilly said the rate hikes and loan default rates for small businesses generally rise in tandem, causing a credit crunch that could persist.
    “We have now hit the point where the Fed is simply putting small businesses out of business,” he said. “When you put the chokehold on small business, really what you’re doing is you’re saying, ‘All those great ideas that are going to develop and turn into something, we’re going to settle for less of those.’ And it’s not a fair playing field, right?”
    On the bright side, if the data continue to cooperate, the Fed at least can take its foot off the monetary policy brake. Regional presidents John Williams of New York and Patrick Harker of Philadelphia both made comments this week indicating they are entertaining putting an end to the rate increases.

    Parsing the numbers

    Whether the Fed indeed does stop will depend on data points such as the CPI reading.
    Breaking down Thursday’s report and the state of inflation could end up being more about the details than what the headline numbers say.
    The shelter and health care components will be closely watched, as will energy and food, as always. Trends in things such as core services also will get attention, as will more granular items like appliances.
    For instance, Bank of America noted that real-time data is showing that retailers are cutting prices across categories for large appliances. The bank’s gauge of prices for the category is down 5% so far this year, possibly pointing to a broader trend of softening inflation.
    Markets, though, are still a little nervous.
    A bond market measure of inflation pricing, known as a forward rate, is pointing to a one-year rate of 4.83%, after falling below 4% in May.
    And for businesses and consumers, that could be trouble. Credit card debt in the second quarter surpassed $1 trillion for the first time, and Uplinq’s Reilly said he expects small business debt default rates to escalate as interest rates stay high.
    “We’ve got a pipeline full of growing delinquencies. All the trends are showing no abatement,” he said. “So this is something that’s going to get a little worse before it gets better.” More

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    Biden to Restrict Investments in China, Citing National Security Threats

    The measure to clamp down on investments in certain industries deemed to pose security risks, set to be issued Wednesday, appears likely to open a new front in the U.S.-China economic conflict.The Biden administration plans on Wednesday to issue new restrictions on American investments in certain advanced industries in China, according to people familiar with the deliberations, a move that supporters have described as necessary to protect national security but that will undoubtedly rankle Beijing.The measure would be one of the first significant steps the United States has taken amid an economic clash with China to clamp down on outgoing financial flows. It could set the stage for more restrictions on investments between the two countries in the years to come.The restrictions would bar private equity and venture capital firms from making investments in certain high-tech sectors, like quantum computing, artificial intelligence and advanced semiconductors, the people said, in a bid to stop the transfer of American dollars and expertise to China.It would also require firms making investments in a broader range of Chinese industries to report that activity, giving the government better visibility into financial exchanges between the United States and China.The White House declined to comment. But Biden officials have emphasized that outright restrictions on investment would narrowly target a few sectors that could aid the Chinese military or surveillance state as they seek to combat security threats but not disrupt legitimate business with China.“There is mounting evidence that U.S. capital is being used to advance Chinese military capabilities and that the U.S. lacks a sufficient means of combating this activity,” said Emily Benson, the director of project on trade and technology at the Center for Strategic and International Studies, a Washington think tank.The Biden administration has recently sought to calm relations with China, dispatching Treasury Secretary Janet L. Yellen and other top officials to talk with Chinese counterparts. In recent speeches, Biden officials have argued that targeted actions taken against China are aimed purely at protecting U.S. national security, not at damaging the Chinese economy.At the same time, the Biden administration has continued to push to “de-risk” critical supply chains by developing suppliers outside China, and it has steadily ramped up its restrictions on selling certain technologies to China, including semiconductors for advanced computing.The Chinese government has long restricted certain foreign investments by individuals and firms. Other governments, such as those of Taiwan and South Korea, also have restrictions on outgoing investments.But beyond screening Chinese investment into the United States for security risks, the U.S. government has left financial flows between the world’s two largest economies largely untouched. Just a few years ago, American policymakers were working to open up Chinese financial markets for U.S. firms.In the past few years, investments between the United States and China have fallen sharply as the countries severed other economic ties. But venture capital and private equity firms have continued to seek out lucrative opportunities for partnerships, as a way to gain access to China’s vibrant tech industry.The planned measure has already faced criticism from some congressional Republicans and others who say it has taken too long and does not go far enough to limit U.S. funding of Chinese technology. In July, a House committee on China sent letters to four U.S. venture capital firms expressing “serious concern” about their investments in Chinese companies in areas including artificial intelligence and semiconductors.Others have argued that the restriction would mainly put the U.S. economy at a disadvantage, because other countries continue to forge technology partnerships with China, and China has no shortage of capital.Nicholas R. Lardy, a nonresident senior fellow at the Peterson Institute for International Economics, said the United States was the source of less than 5 percent of China’s inbound direct investment in 2021 and 2022.“Unless other major investors in China adopt similar restrictions, I think this is a waste of time,” Mr. Lardy said. “Pushing this policy now simply plays into the hands of those in Beijing who believe that the U.S. seeks to contain China and are not interested in renewed dialogue or a ‘thaw.’”Biden officials have talked with allies in recent months to explain the measure and encourage other governments to adopt similar restrictions, including at the Group of 7 meetings in Japan in May. Since then, Ursula von der Leyen, the president of the European Commission, has urged the European Union to introduce its own measure.The administration is expected to give businesses and other organizations a chance to comment on the new rules before they are finalized in the months to come.Claire Chu, a senior China analyst at Janes, a defense intelligence company, said that communicating and enforcing the measure would be difficult, and that officials would need to engage closely with Silicon Valley and Wall Street.“For a long time, the U.S. national security community has been reticent to recognize the international financial system as a potential warfighting domain,” she said. “And the business community has pushed back against what it considers to be the politicization of private markets. And so this is not only an interagency effort, but an exercise in intersectoral coordination.” More

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    Credit card balances jumped in the second quarter and are above $1 trillion for the first time

    Total credit card indebtedness increased by $45 billion in the April-through-June period, a rise of more than 4% and just above $1 trillion.
    The Fed’s measure of credit card debt 30 or more days late rose to 7.2% in the second quarter, the highest rate since the first quarter of 2012.

    Jose Luis Pelaez Inc | Digitalvision | Getty Images

    Americans increasingly turned to their credit cards to make ends meet heading into the summer, sending aggregate balances over $1 trillion for the first time ever, the New York Federal Reserve reported Tuesday.
    Total credit card indebtedness rose by $45 billion in the April-through-June period, an increase of more than 4%. That took the total amount owed to $1.03 trillion, the highest gross value in Fed data going back to 2003.

    The increase in the category was the most notable area as total household debt edged higher by about $16 billion to $17.06 trillion, also a fresh record.
    “Household budgets have benefitted from excess savings and pandemic-related debt forbearances over the past three years, but the remnants of those benefits are coming to an end,” said Elizabeth Renter, data analyst at personal finance site NerdWallet. “Credit card delinquencies continue an upward trend, a growing sign that consumers are feeling the pinch of high prices and lower savings balances than they had just a few years ago.”
    As card use grew, so did the delinquency rate.
    The Fed’s measure of credit card debt 30 or more days late climbed to 7.2% in the second quarter, up from 6.5% in Q1 and the highest rate since the first quarter of 2012 though close to the long-run normal, central bank officials said. Total debt delinquency edged higher to 3.18% from 3%.
    “Credit card balances saw brisk growth in the second quarter,” said Joelle Scally, regional economic principal within the Household and Public Policy Research Division at the New York Fed. “And while delinquency rates have edged up, they appear to have normalized to pre-pandemic levels.”

    Fed researchers say the rise in balances reflects both inflationary pressures as well as higher levels of consumption.
    On the inflation issue, household income adjusted for inflation and taxes is running some 9.1% below where it was in April 2020, putting additional pressure on consumers, according to SMB Nikko Securities.
    “This is an issue because the sustainability of consumers’ pandemic debt-binge was partially predicated upon their incomes steadily rising,” Troy Ludtka, senior U.S. economist at SMBC Nikko, said in a client note. “Instead, the opposite occurred, and now the rate at which borrowers are running late on their debt payments is back to pre-Covid levels. This could be the newest challenge facing embattled commercial banks.”
    The central bank also said demand for card issuance has eased, which has come in conjunction with banks saying that credit standards are tightening.
    Debt across other categories showed only modest changes. Newly originated mortgages rose to $393 billion though total mortgage debt nudged lower to just over $12 trillion. Auto loans increased by $20 billion to $1.58 trillion and student loans decreased to $1.57 trillion ahead of the lifting of the moratorium on payments.
    Correction: Newly originated mortgages rose to $393 billion. An earlier version misstated the move. More