UBS On-Air: Paul Donovan Daily Audio 'All about inflation'
The desk detects a resurgence in inflation concerns driven by persistently high crude oil prices, which remain above USD 90 per barrel amid escalating geopolitical tensions in the Gulf region. Per the full note from UBS, consumers' adaptive spending behaviors in response to these rising fuel costs are likely underreported in traditional inflation measures. This discrepancy could lend resilience to consumer spending, crucial for multiple economies looking to stabilize growth. As the market digests these dynamics, positioning in related currency pairs should be closely monitored, particularly as we move through the end of August.
What the desk is arguing
The desk posits that while inflation fears are rekindling due to elevated oil prices, the real impact on consumers may be overstated. Per the full note from UBS, the adjustments in consumer spending habits—particularly in energy usage—indicate that the actual inflation rate felt by households is likely lower than reported figures suggest.
Supporting this view, the July UK inflation data met market expectations, reflecting the lagged effects of energy pricing adjustments, a dynamic that may be mirrored in other economies. Notably, the cost of owner-occupier housing was a significant contributor to inflation, exacerbating energy price effects on budgets.
Where it sits in our coverage
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How other firms see it
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What the calendar says
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Key takeaways
- 01Crude oil prices remain a significant inflation driver, exceeding $90 per barrel.
- 02Consumer spending adjustments are likely diminishing reported inflation impacts.
- 03UK inflation data aligns with expected trends, reflecting broader energy pricing dynamics.
- 04Geopolitical tensions could exacerbate oil price volatility, influencing market dynamics.
Market implications
Traders should keep a close eye on oil prices and their implications for related currencies, particularly in the context of potential market adjustments to consumer behavior data. Any shifts in crude could signal reassessments in inflation expectations.
Risks to this view
A potential resolution to geopolitical tensions in the Gulf could lead to a sharp reduction in oil prices, thereby easing inflationary pressures and altering consumer spending dynamics. On the other hand, failure to stabilize market conditions could lead to more significant inflation, prompting central banks to respond rapidly, disrupting current market expectations.
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 19th of August. The Financial Times is reporting that Iran is contemplating striking US military assets in Southeastern Europe in the event that there is any escalation of the war.
There is also a suggestion that because Iran does not believe the United States can be trusted to honour any agreement, there must be a greater demonstration of force by Iran. The United Arab Emirates has suspended trade with Iran after Iran fired two missiles at shipping near the country. Crude oil remains over $90 a barrel, which is awakening some concerns about the inflation consequences.
It is worth noting that while the higher inflation rate absolutely cannot be ignored, the report reported numbers on inflation are probably overstating the impact on consumers. Consumers do appear to have adapted their spending patterns to increased fuel costs and any change in consumption is therefore not properly captured in the inflation calculation. Being more economical with oil use would mean that a household's actual inflation rate would be lower than is being reported.
This is not something central banks will care about, but alongside savings use, it does help to create consumer spending resilience. The UK's inflation data for July was in line with the market consensus. There was a very predictable increase due to the weird way the UK allows energy pricing to take place.
The lagged effects of the war were felt this month with the raising of the electricity price cap. The fictional owner-occupier's housing cost was the second largest contribution to the headline consumer price inflation measure. Producer price inflation was also as expected for the output measure, though it was below expectations higher up the supply chain on the input measure.
The United States will not be imposing a 50% tax on US importers of Canadian goods after all. US President Trump announced the decision on social media two hours before tariffs were due to take effect. Investors are not, perhaps, surprised by this decision.
The US administration has long established habits of making threats over trade, tariffs and then backing down. With the affordability crisis remaining a key political issue in the States and tariffs being passed from US importers to US consumers with considerable speed, so visible attacks would have been an unusual course to pursue. However, the threat of the tax will have had some economic consequences.
The uncertainty caused by this will have impacted longer-term business planning on both sides of the border. The recurring question of whether the US can be relied upon to honour international agreements also has global implications. We get final euro consumer price inflation data for July published today, but this is not going to interest financial markets a great deal, given that final euro area consumer price inflation is not known for offering surprises.
Of a little more interest, European Central Bank President Lagarde is speaking at a World Economic Forum event. There are two reasons to pay attention. One is that Lagarde has been quite and characteristically quiet of late.
The other is that there's been a lot of speculation that Lagarde would like to head up the World Economic Forum in retirement, and that desire might prompt a slightly early exit from the European Central Bank. That's all for today. Have a good day.
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