UBS On-Air: Paul Donovan Daily Audio 'Inflation games'
Lead — The recent commentary by UBS highlights the deteriorating quality of U.S. inflation data, with growing concerns over the Bureau of Labor Statistics reducing its price survey sample, potentially impacting the reliability of the reported figures. Per the full note source, the immediate inflationary impacts from recent tariffs are observable, particularly in household appliances, while the auto sector's response to tariffs will be delayed. This nuanced inflation environment suggests traders should prepare for potential shifts in market sentiment as the data continues to evolve.
What the desk is arguing
The desk frames this as a critical juncture for U.S. inflation metrics, emphasizing that the compromised data collection due to budget cuts could lead to misleading inflation signals. Should these trends persist, market participants may re-evaluate their positions, particularly if inflation pressures persist amid declining data integrity.
The fastest monthly increase in household appliance prices, as noted in the UBS commentary, aligns with a stronger pass-through of tariffs to consumer prices, indicating broader inflationary trends that could hinge on consumer behavior and overall spending patterns.
Where it sits in our coverage
Our consensus targets for upcoming inflation data center around a target of 1.075 for the USD, with a range from 1.04 to 1.12, as we assess the pressures from trade tariffs alongside the potential for revised economic forecasts. Current targets from notable firms are as follows: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
Such views reflect our cautious positioning as the bofa forecast leans towards a more subdued inflation outlook, contrasting with the upward pressures indicated by jpmorgan.
How other firms see it
A consensus exists among firms like jpmorgan and others that inflation will continue its upward trajectory, driven by tariff impacts and lessened supply chain efficacy. Conversely, bofa posits a more conservative outlook.
As attention turns to inflation data, the trajectory of USD/JPY may offer insights into broader market responses, particularly as central banks navigate their policy paths in response to inflation dynamics.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Quality of U.S. inflation data is deteriorating due to budget cuts.
- 02Recent tariffs are quickly passing through to consumer prices.
- 03Household appliance prices reflect the fastest increases this century.
- 04Car prices will take longer to adjust to the tariff impacts.
Market implications
Traders should monitor the next consumer price index release, as further deterioration in data quality could lead to significant shifts in market sentiment. If inflation pressures continue to rise, watch for levels around 1.075 as potential levels of technical resistance or support.
Risks to this view
A reversal could occur if the U.S. Federal Reserve signals a shift in policy due to unexpected stability or improvements in the labor market data, easing inflation concerns and altering trader outlooks on USD strength.
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 July. Yesterday's U.S.
June consumer price inflation data gave some troubling signals. The first of these was around the quality of U.S. economic data. The Bureau of Labour Statistics has already reduced the number of prices that it surveys to calculate consumer price inflation and smaller samples do not generally improve quality.
And in the details of yesterday's data, there was additional evidence that budget cuts were causing further problems with data collection. However, on the basis of the numbers published, it is clear that the effects of U.S. President Trump's trade taxes are being passed through to U.S. consumers pretty quickly.
The monthly increase in household appliance prices was the fastest this century. Car prices are falling at the moment, but it takes longer for tariffs to work through the car supply chain because the distance from dockside to parking lot is, in economic terms, a lot longer than with other products. It will be another three months or so before car prices properly begin to reflect trade taxes.
Real consumers notice this inflation. Using the reported headline consumer price inflation data, real wages are still growing positively, although spending power is growing more weakly nowadays. Inflation is still being boosted by the fiction of owner's equivalent rent, a price no one has ever paid nor ever will pay in the real world.
While food price inflation is picking up, the bigger trade tax shocks are showing up in the prices of consumer goods that are bought less frequently. That means that although there is economic damage, there is less perception of economic damage than would be the case with, say, rising egg prices. Egg prices are not yet at last year's levels, but they are the lowest they've been all of this year.
The politics of inflation perception matters. The more consumers perceive price increases, the greater the political pressure on Trump to retreat from the ever-increasing burden of consumer taxes that they have been imposing. US June producer price data today is more relevant to equity markets, as most companies sell to other companies rather than directly to consumers.
The nonsense of owner's equivalent rent is mercifully absent from this measure. Importantly, what producer price inflation helps to do is to assess whether the trade taxes are going to be doing more damage to corporate profit margins or consumer spending power. The more that producer price inflation increases, the more indifferent corporate earnings are likely to be to the trade taxes, as that would be a signal that the taxes are flowing unimpeded down the supply chain direct to the end consumer.
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