UBS Morning audio comment: Inflation you can’t believe in
The UBS Morning commentary delivers a measured perspective on inflation, emphasizing that current data isn't particularly alarming, yet public perception remains skeptical, particularly in the U.S. where reported inflation may not reflect reality for many voters. Per the full note, US inflation figures have seen growing imprecision, with oil price hikes influencing both headline and core rates, although there is little wage-driven pressure. This backdrop suggests central banks are likely to maintain rates steady, as indicated by officials like New York Fed President Williams, who sees no imminent need for rate hikes through at least 2027.
What the desk is arguing
The desk argues that while inflation data appears subdued economically, the significant disconnect between reported figures and public perception evokes caution among traders. Per the full note, the current inflation environment is influenced by moderate consumer responses to food price stability in China and the lack of profit-driven inflation in the U.S.
Further support comes from the observations that price perceptions, especially regarding essentials like beef and electricity, significantly impact consumer sentiment despite the actual inflation rates. Notably, Williams' comments indicate a longer-term view that central banks are under no immediate pressure to adjust interest rates, allowing markets to stabilize without drastic moves.
Where it sits in our coverage
While our internal coverage does not report consensus targets for currencies currently, the implications of these inflation dynamics are critical for FX positioning. For instance, traders may want to keep an eye on how currencies react to inflationary shifts amidst ongoing central bank discussions.
How other firms see it
Given the current atmospheric volatility, firms like jpmorgan sustain an aligned view, targeting a more stable inflation environment with a target of 1.10 for 2026, while bofa presents a contrary stance, anticipating potential volatility with a target at 1.04. This divergence signifies contrasting expectations on monetary policy impacts moving forward.
What the calendar says
With no imminent economic reports slated, FX traders should monitor ongoing developments from central bank gatherings, particularly the rhetoric from the IMF meeting in Thailand where key global policymakers will articulate their inflation outlooks. This could provide guideposts for upcoming market movements around inflation narratives.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US inflation perceptions are increasingly disconnected from reported data.
- 02Central banks show no immediate intent to raise rates, easing pressure for FX markets.
- 03Food prices exert a significant influence on overall inflation statistics.
- 04Consumer sentiment will be impacted by localized price changes on essential goods.
Market implications
Traders should watch for reactions in currency pairs sensitive to U.S. inflation data, particularly as central bank communications increase in the lead-up to the IMF gathering. Levels near 1.075 could pivot sentiment if inflation expectations shift drastically.
Risks to this view
A reversal in the call could occur if inflation data unexpectedly rises or if consumer sentiment shifts positively, undermining the current narrative of persistent skepticism toward reported inflation numbers.
Economically, the inflation data are not too alarming. Politically, voters tend not to believe the reported inflation numbers. View this email in a web browser Inflation you can’t believe in UBS morning audio comment by Paul Donovan China’s September inflation data was not especially exciting.
Food prices kept the consumer price inflation figures moderate (food is nearly 30% of China’s consumer price basket). China is not a noted food exporter, so this has little global bearing. China’s consumers are not responding to low inflation with much enthusiasm.
US consumer price data has become less precise in recent years. Oil costs are being passed on, raising both headline and core inflation rates. Profit-led inflation and wage pressures remain largely absent (apart perhaps from airfares).
Such inflation requires little or no central bank response. New York Federal Reserve President Williams signaled no desire to raise rates in 2027, suggesting little concern about second-round inflation risks. Politically, most US households do not believe the inflation numbers (if survey evidence is believable).
Frequency bias and loss aversion distort inflation perceptions, and inflation perceptions drive the affordability crisis. Price levels also matter at least as much as the latest price change. Details like beef prices (high, and high frequency purchases) and electricity (a politically charged subject) will matter.
Central bankers are jostling for the microphone at the IMF’s gathering in Thailand. The Bank of England’s Bailey and the European Central Bank’s Lagarde are amongst those struggling to be heard. Read important disclaimer 〉 Listen to today's Wednesday, 14 October update Listen now 〉 Recommended content Listen to past recordings in Paul Donovan's daily updates 〉 Nobel Perspectives - Exploring the questions that shape our world 〉 You have received this email because you registered at .
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