Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Wednesday, the 16th of September. Since the pandemic, central banks have suffered from a series of unfortunate events, COVID-related supply chain disruption, war in Ukraine, profit-led inflation, tariffs, war in the Gulf, have come one after another to create a series of one-off increases in the rate of inflation.
Underlying inflation has generally been benign. On the US central bank's own calculations, consumer price inflation in the States would have been below 2% at the start of this year were it not for the effects of US tariffs on domestic consumer prices. But there is an issue, while with the exception of profit-led inflation, these events were beyond the influence and control of central banks, at what point does a series of unfortunate events turn into something that central banks are supposed to do something about?
In other words, when are central banks supposed to say, we can do nothing to control the global oil price, but we can create a recession in the non-oil economy to create disinflation or deflation elsewhere, so that rising oil prices and falling non-oil prices offset each other. It is probably fair to say that one of the series of unfortunate events in the United States is US Federal Reserve Chair Walsh's policy missteps. Walsh and the Fed will have to make a mistake today.
They just have to decide which is the lesser of the two evils before them. On the one hand, raising interest rates will have no effect on inflation, which is energy price driven. Tariff effects are fading from the calculation and that will tend to lower the underlying inflation automatically in the coming months.
This policy would just be a gesture, but it's one that would hurt indebted consumers and companies and would reduce their ability to handle any future crises. On the other hand, if the Fed does not hike, Walsh's inability to guide markets will create a surprise. Accusations of Walsh being a political sock puppet will re-emerge and the credibility of the Federal Reserve will be damaged.
Credibility, once lost, can take years to regain. A loss of credibility would be additionally damaging because US Treasury Secretary House Besant's credibility in the market itself has floundered. Comparing the options side by side today, it seems likely, though not certain, that the Fed will raise rates, but it's still a mistake to do so.
The United Kingdom came out with its data dump of August inflation figures. Consumer prices were broadly in line with expectations. Underlying inflation pressures looked a little more subdued than expected.
Producer prices were higher, however. The critical difference between consumer price and producer price inflation is domestic labour costs and so this gap is suggestive of the absence of second round wage pressures in the economy. The fuel costs were very evident as inflation drivers, both directly and indirectly, for example in more energy-intensive chemical sector pricing.
This does make forecasting the inflation rate right now a lot more problematic. With coke and refined petroleum prices rising 49.1% year over year, a relatively small margin of error in forecasting that price will translate into quite a big miss in terms of the overall inflation forecast. Car and food prices at the producer price level were in deflation, it should be noted.
The United States will be delivering August retail sales data, which is likely to be overshadowed by the Fed's dilemma, of course. However, the expectation is for reasonable levels of demand. Demand in the States is not likely to be an issue in the near term.
The back-to-school, Thanksgiving, Christmas retail bonanza argues against any faltering on the part of the US consumer, who still has the ability to trim their monthly savings rate further. However, there have been some signs of strain and the US consumer's resilience is more vulnerable, having been subject to more shocks, than is the resilience of other advanced economy consumers. That's all for today.
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