UBS On-Air: Paul Donovan Daily Audio 'Price perception problems'
August US CPI showed no headline surprise, but durable goods inflation turned positive after 29 months of deflation, while food-at-home prices jumped sharply (monthly change highest in nearly three years). Per the full note [ubs-on-air], the desk argues these moves are relative price shifts from idiosyncratic supply factors (coffee harvest, import costs) rather than broad demand-driven inflation. The consumer sentiment poll is dismissed as politically biased, but the desk flags that partisan breakdown of inflation expectations could reveal whether rising food/fuel costs override political narratives. No specific currency pair is cited, but the implication for macro trades is muted unless the narrative shifts to stagflation.
What the desk is arguing
Paul Donovan at UBS GWM argues that the August US CPI data contained no material surprise for financial markets. The key nuance is that durable goods prices, after 29 consecutive months of deflation through April, have now turned positive and are hovering just below 2% year-over-year. Since these are infrequent purchases, the desk expects the consumer perception of this inflation to be more muted, reducing the behavioral impact on spending.
The more actionable development is in food-at-home prices, where the monthly change was the highest in almost three years. Specific items like beef, coffee, and bananas saw very significant increases, driven by poor harvests and import dependencies. The desk stresses these are relative price changes from peculiar supply-side factors, not a general overheating of the US economy.
The alternative read—that rising food and durable goods prices signal a broader inflation resurgence—is implicitly rejected. The desk sees no evidence of a demand-driven spiral, and the Michigan sentiment poll is dismissed as too politically biased to inform monetary policy expectations.
Key takeaways
- 01August US CPI in line with expectations; durable goods prices flip from deflation to ~2% YoY for the first time in 29 months.
- 02Food-at-home prices spike on supply shocks (coffee, beef, bananas); monthly gain is the largest in nearly three years.
- 03Consumer sentiment polls treated skeptically; partisan breakdown of inflation expectations seen as more informative.
- 04No direct FX implications flagged; the data likely reinforces the Fed's wait-and-see stance without shifting rate expectations.
Market implications
No explicit currency pair is mentioned, but the benign core narrative supports a steady USD backdrop. Watch for any surprise in the Michigan sentiment's partisan breakdown, which could influence short-term risk appetite if inflation expectations decouple from economic reality.
Risks to this view
If food and durable goods inflation persist and broaden into services, the Fed's reaction function could shift toward tighter policy. The alternative scenario—where consumers reduce spending due to visible food inflation—would strengthen the case for the Fed to cut, potentially pressuring the USD.
Good morning, this is Paul Donovan, Chief Economist at GBS Global Wealth Management. It's six o'clock in the morning London time on Friday the 12th of September. The US August consumer price inflation data contained no real surprises.
Durable goods price inflation is accelerating. In the 29 months to April of this year, durable goods prices were in deflation territory. Since then, the inflation rate has turned positive and it's hovering a little below 2% year-over-year.
That was to be expected, of course. Because these are less frequent purchases, the perception of this inflation by consumers is likely to be more muted. It's something that erodes spending power, but it does not necessarily change day-to-day behaviour.
The increase in inflation for food consumed at home is different. Food prices leapt compared to last month. The monthly change is the highest in almost three years.
And for specific items like beef, coffee and bananas, the price increase is very significant and likely to be very visible to consumers. Obviously, there are specific reasons. Poor harvest for coffee, the fact that most coffee and all bananas are imported and so on.
This means that the price increases are not symptomatic of a general imbalance in the US economy. Rather, relative price changes caused by peculiar circumstances, but consumers will notice. This brings us to the Michigan Consumer Sentiment Poll.
Of itself, this is not worth bothering with particularly. Sentiment polls are riven with political bias and the inflation expectations section will be guided by food and fuel prices, rather than the actual price burden faced by US households. However, the partisan breakdown is always illustrative, especially on the inflation expectations side.
The question is whether partisan bias is being overcome by economic circumstances. Confidence in a particular economic scenario changes if rising food and fuel prices push up Republican inflation expectations, or if changing perceptions about import prices lead to lower Democrat inflation expectations. From the UK, we have the monthly GDP data for July.
This data is just noise, but it fuels political noise, which is rather unfortunate. The UK economy has been the strongest performing G7 economy year to date, and so how growth fares at the start of the second half is of interest. Whether the monthly GDP data is of any use in telling economists what growth is doing at the start of the second half is a very uncertain point.
The July trade balance data needs to be considered in the context of precious metal flows, which have been rather complicated of late. From the glittering wonder that is the euro, we get final Spanish and French consumer price inflation. Do we care?
Listener, we do not. There is also a pontification of ECB speakers. Do we care?
Almost certainly not. The declaration that policy is currently in a good place made yesterday does not foster many expectations for interesting insights or controversial outlooks from the speakers today. That's all for today.
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