Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Wednesday the 13th of May. Yesterday's US April consumer price inflation number was slightly higher than expected.
Investors should not read too much into that. After cuts to government employment, more and more of the consumer price inflation data is guesswork. It might be presented as educated guesswork, but actual prices are not being measured.
The fictitious owner's equivalent rent that no one pays and no one in the real world cares about also increased. What people will care about is inflation perceptions. Since US President Trump took office, coffee prices for home consumption have risen 24% and beef prices are up over 19%.
Vegetarians do not escape with vegetables up 10.5% and gasoline prices are up over 19% over the course of this administration. These are the prices that consumers notice and care about because they are all high frequency purchases. This is why Trump's approval rating for handling the affordability crisis is so extremely low.
While Trump declared not to think about Americans' financial situation, markets are betting the President does care about how Americans think about their financial situation. It doesn't matter that the perception of the cost of living is not the same thing as reality, nor does it matter that the government can do little about some of these price increases. Some government policies have raised prices.
The war with Iran has raised prices. And markets are betting that those government actions will be reversed or at least held in check by inflation perceptions. Trump is visiting President Xi in China with markets largely disinterested.
While there will doubtless be some social media-ready headlines to come out of the agreement, it's worth remembering that the investment commitments and purchase commitments various countries make when doing deals with the US administration are subsequently often quietly ignored. It is very unlikely that anything will come out of this visit to change US perceptions around pricing, for instance. Politically, the best hope is that China exerts some pressure on Iran to do a deal with the United States.
At the moment, the balance of pressures in the Gulf War is probably unevenly distributed, and China could try and even things out a bit. Whether China wishes to do so is quite another question. Europe offers its GDP data and employment figures, which are not really a market focus.
The earlier release of data from the component countries rather steals the attention away from these aggregated numbers. Europe's demographics don't really allow for dramatic increases in GDP for two reasons. Firstly, it's quite hard to get a strong GDP print in countries like Italy or Germany, where the population is actually falling.
Secondly, ageing populations tend to do more and more economic activity outside of the GDP calculation through things like volunteering. The result is that living standards move further away from GDP in ageing societies. The United States delivers April producer price inflation data, which again is about energy costs.
This does not have the political impact of rising consumer prices, but what is likely to show is that US companies are passing on the higher costs that they are receiving. Because US consumers are using savings to pay for these higher prices, as they did with tariffs, this means that companies, for now at least, are able to pass on higher costs without doing serious damage to the volume of demand. Only where there are physical supply shortages are there likely to be problems for companies, because there both cost and volume would be impacted.
It's probably far too soon for such physical supply shortages. This material has been prepared and published by the Global Wealth Management Business of UBS Switzerland AG, regulated by FINMA in Switzerland. It's subsidiaries, or affiliates, collectively referred to as UBS.
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