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 14th of October. China's consumer price inflation came in at 0.9% year-over-year in September, a little lower than had been expected.
Producer price inflation was higher at 5%. The obvious fuel cost impact was in the producer price numbers, but the consumer has some protection from that by the government's management of the retail oil price. Retail gasoline prices did rise, but they're not reflecting the full cost of oil.
Food prices keep falling, pork prices down 10% for instance, and this matters in an economy where food is almost 30% of the consumer price calculation. This is not something the consumer appears to be too grateful for in China. Unlike developed economies where consumers are cutting back on the amount that they save in order to pay for the higher oil prices, China's consumers are maintaining or increasing their saving in spite of a modest cost of living.
The U.S. September consumer price inflation data is obviously the figure to watch later today. Markets are expecting a rise in the headline and in the core rate.
It's worth remembering that both headline and core inflation have an oil price element to them. It's also worth remembering that a larger part of U.S. consumer price inflation is now calculated through guesswork. So these numbers are not as precise as they used to be in the past.
What matters in terms of policy is whether this inflation story is just first round oil effects, the direct passing through of oil costs to the consumer in terms of gasoline, transport costs and the like. If it is just first round effects, then U.S. interest rates will need to rise once more to prove that the last rate hike wasn't a mistake, even if it was a mistake, but more than that would not really be required. New York Federal Reserve President Williams, who is an important voice on the FOMC, signalled no desire to raise interest rates next year, which would fit in with a view of this sort of inflation.
Any evidence of second round effects, profit-led inflation or wage price pressures, would require further central bank action. The airfare increases have a faint, unpleasant odour of profit-led inflation, perhaps, and that will affect core inflation as well as the headline numbers, but generally speaking, second round effects are absent. Politically, no one believes the inflation figures anyway.
Frequency bias and loss aversion mean that inflation perceptions are generally higher than reality, if you believe the survey evidence at least. So for those obsessing about the affordability crisis, it's not the headline number, but key aspects of the inflation details that are going to matter as the mid-term elections approach. The level of prices is also quite critical, not just the most recent change in prices.
Things like beef prices, which have experienced a considerable increase in the last 18 months, are exactly the sort of thing that consumers and voters remember and focus on. Electricity pricing is also going to be relevant, with the debate about AI power use a key issue at a state election level. The International Monetary Fund's event in Thailand is allowing for some central bank speakers to push their way towards the global microphone in order to dispense their wisdom to the waiting masses.
The Bank of England's Baillie and the European Central Bank's Lagarde are both amongst those jostling for attention. Baillie perhaps gets a bit more interest as there is perhaps more uncertainty about the path for the Bank of England. Lagarde is seen by many as a lame duck now, with their exit date and the race for the next ECB president starting to get much more attention.
That's all for today. Have a good day. 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. In the USA, UBS Financial Services Inc. is a subsidiary of UBS AG and a member of FINRA SIPC. The investment views have been prepared in accordance with legal requirements designed to promote the independence of investment research.
This material is for your information only and it is not intended as an offer or a solicitation of an offer to buy or sell any investment or other specific product. The analysis contained herein does not constitute a personal investment recommendation or take into account the particular investment objectives, investment strategies, financial situation and needs of any specific recipient. This material may not be reproduced or copies circulated without prior authority of UBS.
Please visit www.ubs.com forward slash CIO hyphen disclaimer to read the full legal disclaimer applicable to this material.