UBS On-Air: Paul Donovan Daily Audio 'More taxes ahead'
The desk believes that recent tax threats from President Trump could escalate inflationary pressures in the U.S. economy, particularly impacting consumer perception. Per the full note from UBS, while these proposed taxes focus on less frequently purchased goods like cars and pharmaceuticals, they could create indirect inflation effects that will resonate through the market. Ultimately, how consumers perceive inflation will be crucial, especially if visible inflation through high-frequency purchases begins to rise. This could complicate the political landscape for further tax increases and consumer pricing strategies.
What the desk is arguing
The desk posits that President Trump's threats of additional taxes on certain imports could contribute to rising inflation in the U.S. economy. This perspective aligns with UBS's argument that while high-frequency items are closely monitored by consumers, the less visible taxes on cars and pharmaceuticals could still have substantial ripple effects. For instance, an increase in car prices could impact second-hand markets and insurance rates alike, leading to a broader inflationary narrative.
Supporting this view, UBS highlights that while consumers may not immediately notice the tax increase on imported aluminum during their beer purchases, larger purchases such as vehicles will leave a lasting impression in their wallets over time. As these higher costs trickle down into everyday expenditures, consumer sentiment regarding inflation could shift more dramatically than anticipated.
The alternative scenario would consider a continuation of current tax measures without escalation, which could allow for relative price stability in everyday consumer goods. However, the longer these tax discussions linger, the more likely it is that perception will catch up with reality, complicating Trump's fiscal strategy as public awareness heightens.
Where it sits in our coverage
Our consensus target for USD/EUR sits at 1.075 with a range from 1.04 to 1.12, reflecting expectations from several key firms: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view diverges slightly from bofa, which holds a more cautious outlook at the lower bound, in contrast to jpmorgan, supporting a moderately bullish stance based on expected inflation dynamics.
How other firms see it
Majority opinion is aligned with jpmorgan, anticipating potential inflation and a moderated increase in U.S. consumer prices. Conversely, bofa holds a contrary view suggesting a lower dollar valuation due to more moderate inflation projections. Watch the USD/JPY dynamics for potential shifts influenced by U.S. monetary policy responses to inflation and taxation strategies coming from political leaders.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Trump's new tax threats could worsen inflationary expectations among U.S. consumers.
- 02The impact areas include autos, pharmaceuticals, and semiconductors, which could have long-term effects on prices.
- 03High-frequency purchases will significantly sway consumer perception of inflation.
- 04Political ramifications may limit the ability to implement more consumer-facing taxes.
Market implications
Watch for shifts around 1.075 in USD/EUR as a key resistance and support zone; if inflation data shows acceleration, we could see movement towards the higher end of the range leading into March trading. Additionally, observe consumer sentiment metrics for signs of reaction to these tax discussions.
Risks to this view
A swift political pivot away from these tax threats or an unexpected drop in consumer prices could invalidate the inflation narrative that supports our bullish position on USD/EUR. Should inflation pressures ease rather than escalate, we may see a retraction of bullish sentiment in the dollar's valuation.
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 February. US President Trump is once again threatening to tax US consumers aggressively, this time through high taxes on imported cars, pharmaceuticals and semiconductors.
Is this a serious threat? Trump has retreated with almost indecent haste from trade taxes that US consumers would notice. Taxing Mexican imports would lead to soaring avocado prices and doubtless considerable resentment from Gen Z citizens deprived of their avocado on toast.
However, taxes that are less visible have been levied. Consumers are unlikely to notice the increase in the price of aluminium when buying a six pack of beer, as it raises the price by only about one and a half cents, and that tax has therefore stuck. These taxes that are being proposed fall in between the two categories.
Cars are not a high frequency purchase and that makes their price less noticeable, although higher prices of imported cars will have a knock-on effect onto second-hand car prices and onto insurance costs as well. Higher taxes on imported pharmaceuticals will mean higher health insurance costs, but those will hit with a lag. These taxes are likely to add further to US inflation, but are less obvious than a tariff on a TEMU purchase or a tank of propane.
Perception is what matters when it comes to inflation and it may be that the broader context will dictate whether Trump can continue taxing US consumers in this way. Consumers tend to focus on high-frequency purchases when thinking about inflation, and if those are rising in price, inflation perception is likely to rise swiftly, which would make it more difficult for Trump to keep raising consumer prices via tariffs. As part of the food shopping basket, both directly and indirectly as an ingredient, egg prices get a lot of attention.
A dozen eggs now costs more than the street price of a hit of cocaine. The political fixation on this has a bearing on consumer expectations, and as the Trump administration has just accidentally fired a lot of people trying to contain the spread of avian flu, this sort of price, though relatively trivial to overall consumer spending, is likely to be politically and economically relevant. Inflation perception is also relevant in the United Kingdom, where airfares, petrol prices and food prices drove up headline consumer price inflation in January by more than expected.
Services inflation was more modest than had been expected, and labour-intensive sectors of the economy are not really showing any significant inflation pressures arising from changing employment taxes. The overall picture should not add to concerns at the Bank of England, therefore. The detail is just not showing increasing inflation pressures, and the Bank of England is run by economists who know how to look ahead and not overreact or be data-dependent.
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