UBS On-Air: Paul Donovan Daily Audio 'Paying for price increases'
UBS argues that US consumers are funding holiday spending by cutting savings, not from income gains, a trend that tempers retailer discounting as they pass on tariff-related costs. This consumer behavior, if sustained, supports a sticky inflation narrative. The desk's thesis implies USD strength through elevated consumer-driven price pressures, contrasting with European disinflation where no tariff distortions exist. Consensus on EUR/USD is around 1.075, with a range from 1.04 to 1.12 per our coverage.
What the desk is arguing
UBS Chief Economist Paul Donovan frames Black Friday spending as funded by a declining savings rate rather than real income gains, per the full note [UBS On-Air: Paul Donovan Daily Audio 'Paying for price increases']. Since April, wage increases have nearly dollar-for-dollar matched real spending increases, but inflation has eroded purchasing power, pushing consumers to dip into savings.
The desk highlights specific price rises since March: banana prices up 6.6%, beefsteak up 9.7%, and audio equipment up 16.5% by September. Retailers aim to maintain discounts but are constrained by the desire to pass on higher costs or use tariff narratives to widen margins. For Black Friday to succeed, consumers must continue cutting savings, which the desk views as unsustainable.
This view implicitly rejects the alternative read that Black Friday discounts would fully reverse inflation effects; instead, UBS sees discounts as insufficient to offset cumulative price increases, keeping inflation sticky.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US consumers finance spending via savings cuts, not income growth.
- 02Retailers balance discounting with cost pass-through and margin expansion under tariff narratives.
- 03US inflation data (Black Friday outcomes) will signal consumer resilience.
- 04European inflation releases today contrast with US tariff-driven price pressures.
Market implications
Watch EUR/USD for divergence as European inflation data softens vs. US sticky consumer prices; a successful Black Friday could bolster USD demand. With European governments eschewing tariffs, the EUR may stay pressured on relative inflation differentials.
Risks to this view
If US consumers reverse savings cuts (e.g., due to labor market weakness), inflation could decelerate, weakening the USD. Conversely, aggressive European disinflation might boost EUR/USD if the ECB signals faster rate cuts.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Friday the 28th of November. Today marks, of course, one of the most important festivals in the US year, when US consumers give thanks by spending money they don't have on things they don't need.
This year, however, there is something of a conflict. The tradition of presenting consumers with price discounts will still go ahead, but it's likely to be tempered by the desire to pass on higher costs and or to use the tariff narrative to persuade consumers to accept higher profit margins in disguise. Since April of this year, US consumers have had pay rises, and those pay rises have funded, almost dollar for dollar, the increase in real spending.
However, since the March inflation print this year, prices have risen in the States. By September, banana prices were up 6.6% in just six months, beefsteak prices up 9.7% and audio equipment up 16.5%. Those price increases, along with the many other price increases, have been paid for by US consumers cutting back on their savings rate.
Consumers need to be willing to keep cutting back on the savings rate to make this year's Black Friday successful, as it is unlikely that the price discounts will reverse that much of the overall inflation increases. Inflation is also an issue in Europe today, with the release of the November consumer price inflation data from France, Italy, Spain, Portugal and Germany. The thing is that inflation is not really a focus in Europe, because the European governments have not engaged in a tariff war and the EU has chosen not to levy trade taxes on its own companies and consumers.
There can, of course, be local idiosyncrasies in the data. Controlled prices can create quite a lot of variation in the numbers for one thing, and different weightings to different goods are relevant at a time when there has been a certain amount of relative price movement. But the general conclusion from today's European numbers is that inflation rates in the Euro area are going to be fairly stable and very unexciting from a market perspective.
These are the sort of data releases that will fuel perhaps a somewhat smug complacency on the part of the European Central Bank. US President Trump has called for reverse migration in the United States and announced that immigration from an unknown group of countries will be suspended. If this is actually carried out, the result is likely to be a further decline in the US trend rate of growth, which has probably fallen already to around 2%, give or take.
Land growth rates in any economy are a function of how many workers there are and how hard those workers work in terms of their measurement of economic output. Reducing the number of working-age migrants into a country obviously affects the former characteristic and migrants, whether legal or illegal, also tend to be more productive than the local population, which has a bearing on the latter characteristic. The UK's reduction in net inward migration, largely a function of more former students and other foreign nationals leaving the UK, will similarly raise issues with the trend rate of growth in the UK.
Trend growth, in turn, has implications for fiscal policy. 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.
Sources & References
How we cover this story