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    How the Car Market Is Shedding Light on a Key Inflation Question

    How easily companies give up swollen profits could determine how easily the Federal Reserve can cool inflation. Dealerships offer clues.In a recent speech pointedly titled “Bringing Inflation Down,” Lael Brainard, the Federal Reserve’s vice chair, zoomed in on the automobile market as a real-world example of a major uncertainty looming over the outlook for price increases: What will happen next with corporate profits.Many companies have been able to raise prices beyond their own increasing costs over the past two years, swelling their profitability but also exacerbating inflation. That is especially true in the car market. While dealerships are paying manufacturers more for inventory, they have been charging customers even higher prices, sending their profits toward record highs.Dealers could pull that off because demand has been strong and, amid disruptions in the supply of parts, there are too few trucks and sedans to go around. But — in line with its desire for the economy as a whole — the Fed is hoping both sides of that equation could be on the cusp of changing.“With production now increasing, and interest-sensitive demand cooling, there may soon be pressures to reduce vehicle margins and prices in order to move the higher volume of cars being produced off dealer lots,” Ms. Brainard explained during her remarks.The Fed has been raising interest rates to make borrowing for big purchases — cars, houses, business expansions — more expensive. The goal is to cool demand and slow the fastest inflation in four decades. Whether it can pull that off without inflicting serious pain on the economy will hinge partly on how easily companies surrender their hefty profits.If companies begin to lower prices to compete for customers as demand abates, price increases might slow without costing a lot of jobs. But if they try to hold on to big profits, the transition could be bumpier as the Fed is forced to squeeze the economy more drastically and quash demand more severely.“There has been a giant shift in bargaining power between consumers and corporations,” said Gennadiy Goldberg, senior U.S. rates strategist at TD Securities. “That’s where the next adjustment has to come — corporations have to see some pain.”The example of the auto industry offers reasons for hope but also caution. While there are signs that price increases for used cars are beginning to moderate as supply recovers, that process has been halting, and the new-car market illustrates why the path toward lower profits that help slow inflation could be a long one.That’s because three big forces that are playing out across the broader economy are on particularly clear display in the car market. Supply chains have not completely healed. Demand may be slowing down, but it still has momentum. And companies that have grown used to charging high prices and raking in big profits are proving hesitant to give up.The auto market split into two segments that are now diverging — new cars and used cars.New-car production was upended as the pandemic shut down factories making semiconductors and other parts, and it is only limping back. Freshly minted vehicles remain extraordinarily scarce, according to dealers and data, and several industry experts said they didn’t see a return to normal levels of output for years as supply problems continue. Prices are still increasing swiftly, and dealer profits remain sharply elevated with little sign of cracking.Inflation F.A.Q.Card 1 of 5What is inflation? More

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    'Path to oblivion': Ukraine military gains could deepen Russia's economic problems

    Ukraine’s military has had stunning success in recent weeks, recapturing Russian-occupied territory in the northeast and south of the country.
    Holger Schmieding, chief economist at Berenberg, said the recently Ukrainian military gains could hit Russia’s economy hard.
    The Economist Intelligence Unit is projecting a Russian GDP contraction of 6.2% this year and 4.1% this year, which its Global Forecasting Director Agathe Demarais told CNBC is “huge, by both historical and international standards.”

    Russian President Vladimir Putin attends a meeting of heads of the Shanghai Cooperation Organization (SCO) member states at a summit in Samarkand, Uzbekistan September 16, 2022.
    Foreign Ministry Of Uzbekistan | via Reuters

    Ukraine’s counteroffensive, which has seen vast swathes of Russian-occupied territory get recaptured, could be compounding Russia’s economic troubles, as international sanctions continue to hammer its fortunes.
    Ukraine’s military has had stunning success in recent weeks, recapturing Russian-occupied territory in the northeast and south of the country. Now, Kyiv is hoping to liberate the Luhansk in the eastern Donbas region, a key area where one of two pro-Russian self-proclaimed “republics” is located.

    Holger Schmieding, chief economist at Berenberg, said the recent Ukrainian military gains could hit Russia’s economy hard.
    “Even more so than before, the Russian economy looks set to descend into a gradually deepening recession,” Schmieding said in a note last week. 
    “The mounting costs of a war that is not going well for [Russian President Vladimir] Putin, the costs of suppressing domestic dissent and the slow but pernicious impact of sanctions will likely bring down the Russian economy faster than the Soviet Union crumbled some 30 years ago.”

    Ukrainian soldiers ride on an armored vehicle in Novostepanivka, Kharkiv region, on September 19, 2022.
    Yasuyoshi Chiba | Afp | Getty Images

    He highlighted that Russia’s main bargaining chip when it comes to the international sanctions imposed by the West – its influence over the energy market, particularly in Europe – was also waning.
    “Although Putin closed the Nord Stream 1 pipeline on 31 August, the EU continues to fill its gas storage facilities at a slightly slower but still satisfactory pace,” he noted, adding that even Germany — which was particularly exposed to Russian supplies — could even get close to its 95% storage target ahead of winter.

    Energy problems

    Europe’s rapid shift away from Russian energy is particularly painful for the Kremlin: the energy sector represents around a third of Russian GDP, half of all fiscal revenues and 60% of exports, according to the Economist Intelligence Unit.
    Energy revenues fell to their lowest level in over a year in August, and that was before Moscow cut off gas flows to Europe in the hope of strong-arming European leaders into lifting the sanctions. The Kremlin has since being forced to sell oil to Asia at considerable discounts.
    The decline in energy exports means the country’s budget surplus has been heavily depleted.
    “Russia knows that it has no leverage left in its energy war against Europe. Within two or three years, the EU will have gotten rid of its dependency on Russian gas,” the EIU’s Global Forecasting Director Agathe Demarais told CNBC. 
    This is a key reason why Russia has opted to cut off gas flows to Europe now, she suggested, with the Kremlin aware that this threat could carry far less weight in a few years’ time.

    GDP slump

    The EIU is projecting a Russian GDP contraction of 6.2% this year and 4.1% next year, which Demarais said was “huge, by both historical and international standards.”
    “Russia did not experience a recession when it was first placed under Western sanctions in 2014. Iran, which was entirely cut off from Swift in 2012 (something that has not happened to Russia yet), experienced a recession of only around 4% in that year,” she said.
    Statistics are scarce on the true state of the Russian economy, with the Kremlin keeping its cards relatively close to its chest. However, Bloomberg reported earlier this month, citing an internal document, that Russian officials are fearing a much deeper and more persistent economic downturn than their public assertions suggest.
    Putin has repeatedly claimed that his country’s economy is coping with Western sanctions, while Russia’s First Deputy Prime Minister Andrei Belousov said last month that inflation will come in around 12-13% in 2022, far below the gloomiest projections offered by global economists earlier in the year.
    Russian GDP contracted by 4% in the second quarter of the year, according to state statistics service Rosstat, and Russia upped its economic forecasts earlier this month, now projecting a contraction of 2.9% 2022 and 0.9% in 2023, before returning to 2.6% growth in 2024.

    However, Demarais argued that all visible data “point to a collapse in domestic consumption, double-digit inflation and sinking investment,” with the withdrawal of 1,000 Western firms also likely to have implications for “employment and access to innovation.”
    “Yet the real impact of sanctions on Russia will be felt mostly in the long term. In particular, sanctions will restrict Russia’s ability to explore and develop new energy fields, especially in the Arctic region,” she said. 
    “Because of Western penalties, financing the development of these fields will become almost impossible. In addition, U.S. sanctions will make the export of the required technology to Russia impossible.”

    Sanctions ‘here to stay’

    European Commission President Ursula von der Leyen delivers the State of the European Union address to the European Parliament, in Strasbourg, France, on Sept. 14, 2022.
    Yves Herman | Reuters

    “We have cut off three quarters of Russia’s banking sector from international markets. Nearly one thousand international companies have left the country,” she said.
    “The production of cars fell by three-quarters compared to last year. Aeroflot is grounding planes because there are no more spare parts. The Russian military is taking chips from dishwashers and refrigerators to fix their military hardware, because they ran out of semiconductors. Russia’s industry is in tatters.”
    She added that the Kremlin had “put Russia’s economy on that path to oblivion” and vowed that sanctions were “here to stay.”
    “This is the time for us to show resolve, not appeasement,” von der Leyen said.

    As the Kremlin scrambles to strengthen security ties, having been shunned by the West, a top Russian official stated on a visit to Beijing last week that Moscow sees deepening strategic ties with China as a key policy aim. Putin also met Chinese President Xi Jinping in Uzbekistan last week as the two countries touted a “no limits” relationship.
    However, several commentators have noted that as Russia’s bargaining power on the world stage wanes, China will hold most of the cards as the two superpowers attempt to cement further cooperation.
    “In the long term, China will be the sole economic alternative for Russia to turn to, but this process will be tricky, too, as China will remain wary of becoming overdependent on Russian commodities,” the EIU’s Demarais added.

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    Egypt Feels Pain of Global Disruptions Wrought by War and Pandemic

    The country’s economy has been very hard hit by cascading crises which have disrupted worldwide trade.When the state-owned factory where Hesham al-Atar worked for 15 years was liquidated this month, he had a feeling it was linked to international pressure on the Egyptian government to reduce its role in the economy amid a severe downturn.Mr. el-Atar, 39, was a supervisor at the factory, El Nasr Coke and Chemicals Plant, which turned coal into a fuel called coke used in iron and steel production. Now, with his daily expenses rising, he said that he fears he will not be able to find another job near his home in the city of El Saf, about two hours south of the Egyptian capital.“I don’t know what to do,” he said. “I have four kids. We’re used to a certain standard of living. It will have to change.”Egypt, which relies heavily on imported goods and foreign borrowing, has been badly battered by the cascading disruptions to global trade from the pandemic and Russia’s war on Ukraine. The exit of foreign investment capital, a collapse in tourism and spiking commodity prices have all translated into a foreign-currency shortage.The government has responded by implementing more onerous import rules, devaluing the local currency and pushing up interest rates. It has also taken steps to privatize or shut down state-owned enterprises, a key demand of international investors and creditors who say the government’s outsized role in the economy hinders private investment.But at the same time, Egypt has succeeded in raising more than $22 billion this year in investment pledges from wealthy Gulf allies leery of seeing one of the pillars of the Arab world on the brink after a decade of tumult that began with the country’s 2011 uprising.Consumers immediately felt the impact of the government’s response to the crisis, particularly Egypt’s middle class, which has been whittled away by a persistent lack of job opportunities, decreases in consumer subsidies, paltry spending on health and education and a regressive tax system that goes in no small part to fund grandiose infrastructure projects.The import rules introduced at the beginning of the year required companies to pay for goods up front through the national banking system. That left some imported goods stuck in the ports and created shortages, though the government has since taken steps to ease the problems.In March, the central bank devalued the currency by about 14 percent and prices shot up. Salaries, however, did not.“We have to pay European prices on Egyptian salaries,” said Mona Hosni, a 34-year-old Cairo resident. “Our salaries are not like Europeans!”Ms. Hosni works on one side of Cairo and studies on the other. With the rise in prices, she cannot afford to move out of her family home in the suburb of Helwan. So she spends about three hours a day driving her 2011 Nissan between home, school and work.A new car is out of the question.High-rise buildings in Cairo seen from the Nile in 2020.Sima Diab for The New York TimesThe roads she drives on are lined with new developments and billboards advertising luxury real estate, even as much of the country remains mired in poverty.In recent years, President Abdel Fattah el-Sisi has overseen a huge building boom, borrowing from abroad to fuel Cairo’s inexorable sprawl. The government is even erecting a new capital in the desert, not far from the current one, at a cost of some $59 billion.Samer Atallah, an economics professor at the American University in Cairo, said that the country had taken on tremendous debt — which is becoming more expensive by the day as interest rates rise — without investing in the kinds of things that could create more exports, more sustainable economic growth or steady government revenues.“Fundamentally, the economy was geared up for a crisis,” he said.The government has been in talks with the International Monetary Fund about a loan: Economists estimate that Egypt may need $15 billion over the next three years, though the government has said it will seek a smaller package. And Egypt is expected to devalue the currency even further soon.The government must balance the demands of investors — whose money could help alleviate the economic crisis — with the risks of implementing measures that could cause even more economic pain for its citizens.International lenders have urged Egypt to privatize more of its economy as one way to achieve more lasting economic growth. Much of the economy has long been controlled by the state through moribund government-owned companies.In the case of the El Nasr factory where Mr. al-Atar worked for 15 years, the government said that it had incurred a loss of about $1.5 million last year and had no possibility of modernizing or improving its financial standing. The factory, which began production in 1964, was emitting significant pollution, according to news reports and government documents.Mr. el-Atar is now a union representative negotiating a severance package for the workers but whatever deal is reached, the money surely won’t go far given the rising prices and currency devaluation.The military’s control over a range of businesses has stifled competition from the private sector in industries from concrete to pasta production by leaning on advantages such as free conscripted labor and exemptions from taxes and customs fees.Egypt has promised before to privatize without following through. But as the economy cratered this year, the government has shown signs of renewed resolve, starting to sell off or shut down several state-owned companies.Across Cairo, people from all walks have been forced to adjust their daily routines to adapt to the economic pressures.At an auto-repair shop in one suburb, two managers said that the cost of parts they need from Europe had shot up and that they were losing customers because of the higher prices. Business is half of what it was before the pandemic, they added.“We’re all struggling,” said Mostafa el-Gammal, the general manager. “It’s showing on everyone.”Though they haven’t laid anyone off, wages at the shop are stagnant.Mr. el-Gammal said that he tried to shield his four children from the economic decline. But he said he was taken aback when he went to buy two of them backpacks for the start of the school year and shelled out double what he had in the past.His colleague who manages the auto shop, 33-year-old Mohamed Farouk, said that he had transferred his 6-year-old son to a more affordable school near their home in Nasr City, another Cairo neighborhood.The government has also tried to increase revenue by raising fees for its services.Assem Memon, 39, runs AdMazad, a private business with 14 employees that collects data on billboards to sell to companies that want to optimize ad campaigns. He said the economic slowdown and devaluation have complicated his plans to expand outside Egypt.A construction site at Egypt’s new administrative capital east of Cairo in September.Khaled Elfiqi/EPA, via ShutterstockThe government was creating headaches for employers, Mr. Memon said, including a new Ministry of Finance online portal that must be used for all business-to-business transactions. The aim is to allow the government to see every transaction.Some tax withholding practices were also changed, he added, reducing the cash he can keep on hand. While he understands the government is aiming to increase revenue, he said the approach could deter entrepreneurship.“It’s suffocating small businesses,” he said.Gamal Osman, 59, a warehouse worker in Tanta, a city about two hours north of Cairo, said he was also paying more in fees for basic services, like renewing his identification card. He said that he had cut back to eating meat only once every two weeks and that, still, he could not save money like he used to.“You can feel it in everything you do,” he said. “From the moment you step onto the street until the moment you go to sleep.”Still, others see opportunity in the hardship.Mohamed Ehab is a marketing director for an auto company that introduced Jetour, a Chinese brand, into the Egyptian market in 2020. Sales were booming last year, but the new import rules have snarled the business.The company stopped accepting orders months ago and is focusing on expanding service centers.Mr. Ehab said that there was still demand for a practical family car, even after prices shot up with the devaluation. The company’s lowest-priced car went up to $26,000 from about $18,000, largely because the importers have to pay China in dollars.But he is hopeful that the impasse will spur the government to offer incentives for auto companies to assemble their products inside Egypt, which could generate jobs and make cars more affordable.“It’s a difficult time, but I think it’s part of a bigger, good story,” he said. More

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    What Comes Next in the Fed’s Fight Against Inflation?

    Wall Street will watch the central bank’s economic forecasts closely on Wednesday, when another jumbo-size rate increase is expected.The Federal Reserve is expected to deliver a third straight supersize interest rate increase this week as it wages its most aggressive fight against inflation since the 1980s — and it could signal even more to come.Central bankers are widely expected to raise interest rates three-quarters of a percentage point at their meeting on Wednesday, and investors think there is even a small chance of a full percentage-point move.But Wall Street is more focused on what comes next. Officials will release updated economic forecasts for the first time since June after their two-day meeting this week. Those are expected to show a more forceful path ahead for rates than Fed officials previously anticipated as rapid inflation continues to plague America. The question is just how much more assertive the Fed will be.Central bankers have already raised interest rates considerably in an attempt to slow the economy and temper price increases. Business activity is slowing in response, but it is not falling off a cliff: Employers continue to hire, wages are rising, and inflation has remained stubbornly quick.That has prompted officials to reinforce in speeches that they are serious about getting price increases under control, even if doing so comes at a cost to growth and the labor market. It’s an inflation-focused tone that many on Wall Street refer to as “hawkish.”The economic projections could give policymakers the chance to underline that commitment.“Things are not quite evolving as they had expected — they’re having trouble slowing the economy,” said Gennadiy Goldberg, a U.S. rates strategist at TD Securities. “At the end of the day, there is very little they can do this week but sound hawkish.”Jerome H. Powell, the Fed chair, will hold a news conference after the release, and is likely to echo his pledge late last month to do what it takes to wrestle prices lower.That could be a painful process, Mr. Powell has acknowledged. Higher interest rates temper inflation by making it more expensive to borrow money, discouraging both consumption and business expansions. That weighs on wage growth and can even push unemployment higher. Firms cannot charge as much in a slowing economy, and inflation cools down.“While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” Mr. Powell said last month. He later added, “We will keep at it until we are confident the job is done.”If the Fed continues raising rates along the trajectory that economists and investors increasingly expect, the fallout could be painful. In the early 1980s, the last time inflation was as high as it is today, the central bank under Paul A. Volcker jerked borrowing costs sharply higher and mired the economy in a recession that sent joblessness to double-digit levels. Homebuilders mailed Mr. Volcker two-by-fours from buildings they could not build; car dealers sent keys from cars they could not sell.Inflation F.A.Q.Card 1 of 5What is inflation? More

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    The Subprime Loans for College Hiding in Plain Sight

    Many families can borrow most of the cost of college using a Parent PLUS loan. This will not end well.If you want your kids to go to college but you can’t afford the bills, the federal government has a deal for you that will blow your mind.You can borrow the entire cost — minus any other aid your child receives — through something called a Parent PLUS loan. Moreover, your income — and thus your ability to repay the debt — doesn’t matter. As long as you don’t have one of a handful of black marks in your recent credit history, you can borrow six figures even if your take-home pay puts you below the federal poverty level.This is totally bananas. But don’t take my word for it.“The honest truth is that Congress created a subprime lending program unintentionally,” said Rachel Fishman of New America, the left-leaning think tank.“I absolutely hate them,” said Beth Akers, of the American Enterprise Institute, the right-leaning think tank, referring to these loans.“It’s gone completely off the rails,” said Justin Draeger, the president of the National Association of Student Financial Aid Administrators.Most parents don’t pay for college using this loan. But about 3.6 million of them — with about $107 billion in outstanding debt — have. Within that group are a number of low-income Black families at schools that may not have given their kids enough help in the way of scholarships. Many of those families are struggling to repay the money that the federal government so freely offered up.And, really, why wouldn’t moms and dads use a PLUS loan if it appears to be the least horrible option? For many people, parenting means keeping the American promise that children should do better than family members from previous generations. A college degree is a rocket booster that can help make that possible.When Congress created parent PLUS loans in 1980, there were decent reasons for doing so. College costs had increased, and many middle-income families struggled to pay for tuition out of their income. At the time, interest rates were also very high.The PLUS loan, which came with a lower-than-market interest rate, solved a worsening problem. It also made it easier for parents to pay a larger share of the bill and perhaps help their children borrow less.At the time, you could borrow only $3,000 per year. In 1992, that cap went away, thanks, it seems, to a successful push by a higher education lobbying association, according to a report from the Urban Institute report in 2019.What to Know About Student Loan Debt ReliefCard 1 of 5Many will benefit. More

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    Here’s why Hispanic workers could face an outsized hit in a U.S. recession

    Hispanic workers will likely be disproportionately affected in a recession, Wells Fargo said in a report.
    The firm is projecting a mild recession to occur in 2023.
    Job composition and age are contributing factors.

    Huntstock | Disabilityimages | Getty Images

    Turbulent times may be ahead for Hispanic workers, a new report from Wells Fargo found.
    The firm expects Latino workers to take an outsized hit if a mild recession happens in 2023, like it is projecting.

    “The Hispanic unemployment rate tends to rise disproportionately higher than the national average during economic downturns,” Wells Fargo chief economist Jay Bryson wrote.
    For example, from 2006 to 2010, the Hispanic unemployment rate rose about 8 percentage points, while the non-Hispanic jobless rate climbed about 3 percentage points, the firm found. It also was higher than the non-Hispanic jobless rates in the early 1990s and in 2020, Bryson noted.

    Lea este artículo en español aquí.

    Job composition and age are to blame, the data indicates.
    In construction, for instance, Hispanics account for one-third of workers, compared to 18% of total household employment. That interest rate sensitive sector will face “acute challenges in the year ahead,” Bryson said. Mortgage rates have jumped to over 6% and building permits have already fallen by more than 10% since the end of last year, he pointed out.
    There will also be a steeper drop in goods spending over the next year as a consequence of the pent-up demand for services, he said. Right now, overall consumer spending is 14% higher than February 2020 and real services spending is up less than 1% during the same time period.

    “The rotation in spending is likely to lead to sharper job cuts in goods-related industries beyond construction, including transportation and warehousing, retail and wholesale trade, and manufacturing — all industries in which Hispanics represent a disproportionate share of the workforce,” Bryson said.

    However, job concentration in the leisure and hospitality sector, which was hit hard during the pandemic, may offset some of those losses.
    Not only will consumers prioritize spending on missed vacations or eating out in the coming year, but employment in the industry is still about 7% below its pre-Covid levels, Bryson wrote.
    The age factor also works against Hispanics, because workers tend to be younger than non-Hispanics.
    “Junior workers tend to be laid off at a higher rate than workers with more seniority,” Bryson said. “Fewer years of experience makes it harder to find new employment in a weak jobs market.”
    However, Bryson said he doesn’t expect the next downturn to be as damaging to the job market as the previous two recessions.
    “Employers have spent the better part of the past five years struggling to find workers,” he said. “We anticipate employers will hold on more tightly to workers than during past recessions, having a better appreciation of how difficult it may be to hire them back.”
    — CNBC’s Michael Bloom contributed reporting.

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    Retail sales growth sluggish in August as consumers fight to keep up with inflation

    Retail sales rose 0.3% in August, better than expected but boosted largely by a big jump in motor vehicles and parts dealer receipts.
    Weekly jobless claims declined to 213,000, also better than estimates.
    Manufacturing readings from the New York and Philadelphia regions suggested the sector is in contraction.

    Retail sales numbers were better than expected in August as price increases across a multitude of sectors offset a considerable drop in gas station receipts, the Census Bureau reported Thursday.
    Advance retail sales for the month increased 0.3% from July, better than the Dow Jones estimate for no change. The total is not adjusted for inflation, which rose 0.1% in August, suggesting that spending outpaced price increases.

    Inflation as gauged by the consumer price index rose 8.3% over the past year through August, while retail sales increased 9.1%.
    However, excluding autos, sales decreased 0.3% for the month, below the estimate for a 0.1% increase. Excluding autos and gas, sales rose 0.3%.
    Sales at motor vehicle and parts dealers led all categories, rising 2.8%, helping to offset the 4.2% decline in gas stations, whose receipts tumbled as prices fell sharply. Online sales also decreased 0.7%, while bar and restaurant sales rose 1.1%.
    Revisions to the July numbers pointed to further consumer struggles, with the initially reported unchanged but to a decline of 0.4%.
    Also, the “control” group that economists use to boil down retail sales, was unchanged from July. The group excludes sales from auto dealers, building materials retailers, gas stations, office supply stores, mobile homes and tobacco stores, and is what the government uses to calculate retail’s share of GDP.

    “Higher inflation drove the top line sales figure but volumes are obviously falling because on a real basis, sales are negative,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “Core retail sales being well below expectations will result in a cut to GDP estimates for Q3 as stated.”

    Ian Shepherdson, chief economist at Pantheon Macroeconomics, called the release “a mixed report, but we see no cause for alarm.” He said the slump in housing will depress some related sales numbers, but overall spending should up as real incomes rise.
    The retail numbers led a busy day for economic data.
    Elsewhere, initial jobless claims for the week ended Sept. 10 totaled 213,000, a decrease of 5,000 from the previous week and better than the 225,000 estimate. Import prices in August fell 1%, less than the expected 1.2% decline.
    Two manufacturing gauges showed mixed results: The New York Federal Reserve’s Empire State Manufacturing Index for September showed a reading of -1.5, a massive 30-point jump from the previous month. However, the Philadelphia Fed’s gauge came in at -9.9, a big drop from the 6.2 in August and below the expectation for a positive 2.3 reading.
    The two Fed readings reflect the percentage of companies reporting expansion versus contraction, suggesting manufacturing was broadly in a pullback for the month.
    The reports, however, pointed to some softening in price pressures. For New York, the prices paid and prices received indexes respectively declined 15.9 and 9.1 points, though both remained solidly in growth territory with readings of 39.6 and 23.6. In Philadelphia, prices paid fell nearly 14 points but prices received increased 6.3 points. Those indexes respectively were 29.8 and 29.6, indicating that prices are still rising overall but at a slower pace.
    Correction: Retail sales increased 9.1% over the past year through August. An earlier version misstated the percentage.

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    What Price Is Right? Why Capping Russian Oil Is Complicated.

    Officials from the Group of 7 are striving to strike a delicate balance that encourages Russia to keep pumping oil but to sell it at a discount.WASHINGTON — As the United States and its Western counterparts race to finalize the mechanics of an oil price cap intended to starve Russia of revenue and stabilize global energy markets, a crucial question remains unresolved: How should the price be set?The Group of 7 countries that formally backed the price cap concept this month are deliberating how much Russia should be allowed to charge for its oil as they prepare to release more details of the plan. It has emerged as a central question that could determine the success of the novel idea, Russia’s response and the trajectory of oil prices as winter approaches. Setting the price will require aligning the complex array of economic and diplomatic forces that govern volatile oil markets.The consequences of getting the oil price cap wrong could be severe for the world economy, and time is running short. The Biden administration fears that if the cap is not in place by early December, oil prices around the world could skyrocket given Russia’s outsize role as an energy producer. That’s because when a European Union oil embargo and a ban on financial insurance services for Russian oil transactions take effect on Dec. 5, the removal of millions of barrels of Russian oil from the market could send prices soaring.European financing and insurance dominate the global oil market, so the looming sanctions could disrupt exports to parts of the world that do not have their own embargoes — by making it harder or more expensive to get Russian oil at a time when energy costs are already high. The price cap will essentially be an exception to Western sanctions, allowing Russian oil to be sold and shipped as long as it remains below a certain price.The idea has won plaudits from economists who see it as an elegant win-win strategy for the West. But many energy analysts and traders have expressed deep skepticism about the concept. They believe that a fear of sanctions could scare financial services companies off Russian oil, and that Russia and its trading partners will circumvent the cap through new forms of insurance or illicit transactions.The impact of the proposed oil price cap and the potential for unintended consequences are two of the biggest quandaries facing the nations that have been enduring soaring inflation prompted by supply chain disruptions and Russia’s war in Ukraine.The leaders of the Group of 7 in June. In a joint statement this month, the group’s finance ministers said the “initial” price cap would be based on a range of “technical inputs.”Kenny Holston for The New York Times“We are looking at a far more complex oil market,” said Paul Sheldon, a geopolitical risk analyst at S&P Global Platts Analytics. “This is an unprecedented dynamic where you have such a large supplier of oil under unprecedented sanctions. We’re in new territory on several levels.”Exactly how the price cap will be set remains unclear.In a joint statement this month, finance ministers from the Group of 7 said the “initial” price cap would be based on a range of “technical inputs” and decided on by the group of countries that join the agreement. The Treasury Department’s Office of Foreign Assets Control said last week that the price cap would be determined by a “range of factors” and that countries that were part of the price cap coalition would make the decision by consensus. The coalition would be headed by a rotating coordinator from among the countries.A Treasury official said the process for setting the level of the oil price cap would constitute the next phase of the agreement, after technical details about enforcement had been decided and more countries had signed on to the coalition.The State of the WarDramatic Gains for Ukraine: After Ukraine’s offensive in the country’s northeast drove Russian forces into a chaotic retreat, Ukrainian leaders face critical choices on how far to press the attack.In Izium: Following Russia’s retreat, Ukrainian investigators have begun documenting the toll of Russian occupation on the northeastern city. They have already found several burial sites, including one that could hold the remains of more than 400 people.Southern Counteroffensive: Military operations in the south have been a painstaking battle of river crossings, with pontoon bridges as prime targets for both sides. So far, it is Ukraine that has advanced.An Inferno in Mykolaiv: The southern Ukrainian city has been a target of near-incessant shelling since the war began. Firefighters are risking their lives to save as much of it as possible.As U.S. officials think about setting the price cap, they are focused on two numbers: Russia’s cost of producing oil and the price that the commodity historically fetched on global markets before the war in Ukraine sent prices higher.The Biden administration realizes that Russia will not have an incentive to keep producing oil if a cap is set so low that Russia cannot sell it for more than it costs to pump it. However, setting the cap too high will allow Russia to benefit from the upheaval it has caused and blunt the cap’s ability to sufficiently curtail Russia’s oil export revenues.Before the war and the pandemic, Russian crude, known as Urals, typically sold for between $55 and $65 a barrel. Determining Russia’s cost of production is more complicated because some of its wells are more expensive to operate than others. Most estimates are around $40 per barrel.The price cap could settle somewhere among those numbers.Officials are also discussing whether shipping costs should be included in the cap or if it should just include the oil itself. Separate caps would be enacted for Russia’s refined oil products, such as gas oil and fuel oil, that are used for operating machinery and heating homes.A tanker with imported crude oil in China. The Biden administration hopes that even if China does not formally participate in the price cap the country will use it as leverage to negotiate lower prices with Russia.Agence France-Presse — Getty ImagesOil prices have hovered around $90 a barrel in recent weeks. Russian oil is currently selling at a discount of about 30 percent. Some analysts believe that designing the cap as a mandated level below global benchmark prices could be more effective since oil prices can swing sharply.“If you fix it at a certain level, that could create some risks because the market can fluctuate,” said Ben Cahill, a senior fellow in the Energy Security and Climate Change Program at the Center for Strategic and International Studies, who noted that oil prices could fall below the cap level if it was set too high.“To increase the economic pain on Russia, you want to make the capped price substantially lower than the global average,” he said.As of now, the Treasury Department does not appear to support such an idea. The United States intends for the cap to be a fixed price — one that would be regularly reviewed and could be changed if the countries in the pact agreed to do so. The frequency of the reviews would depend on market volatility. Setting the cap at a discounted rate would introduce additional complexity and compliance burdens, the Treasury official said, because the cap rate could change hourly.Making sure the price cap is adhered to is another hurdle. Treasury Department officials have been holding discussions with banks and maritime insurers to develop a system in which buyers of Russian oil products would “attest” to the price that they had paid, releasing providers of financial services of the responsibility for violations of the cap.In its guidance last week, the Treasury Department said service providers for seaborne Russian oil would not face sanctions as long as they obtained documentation certifying that the cap was being honored. However, it did warn that buyers who knowingly made oil purchases above the price cap using insurance that was subject to the ban “may be a target for a sanctions enforcement action.”The impact of a price cap on global markets is difficult to predict. Mr. Cahill suggested that it could essentially create three tiers of crude, with some Russian oil being sold at the capped price, other Russian oil being sold illicitly or with alternative forms of financing and non-Russian oil being sold by other oil-producing nations.It is not clear how many countries beyond the Group of 7 will join the agreement. The Biden administration is hopeful that even if countries such as China and India do not formally participate they will use it as leverage to negotiate lower prices with Russia.Besides the oil cap’s price, the other big wild card is Russia’s response to it. Russian officials have said they will not sell oil to countries that are part of the price cap coalition, and analysts expect that the country will do its best to fan the volatility with some form of retaliation.The United States hopes that economic logic will prevail and that oil will keep flowing, albeit at a cheaper price.“Russia may bluster and say they won’t sell below the capped price, but the economics of holding back oil just don’t make sense,” Wally Adeyemo, the deputy Treasury secretary, said at a Brookings Institution event last week. “The price cap creates a clear economic incentive to sell under the cap.”Edward Fishman, a senior research scholar at the Center on Global Energy Policy at Columbia University, argued that the price cap could work because the incentives that it would create aligned most buyers, sellers and facilitators of oil transactions toward compliance. He suggested that global oil prices could end up organically gravitating toward the level of the price cap.However, Mr. Fishman acknowledged that Russia and its president, Vladimir V. Putin, might read the incentives differently.“There’s always a sliver of a doubt in people’s minds about Putin’s rationality and his willingness to set the global economy, and his own economy, ablaze in order to make a point,” Mr. Fishman said. More