Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 6.30 in the morning London time on Wednesday the 14th of January. Yesterday's US consumer price inflation data was not a trigger for a rush to easing policy on the part of the Federal Reserve.
The report was more or less in line with expectations, but the composition hints at some upward pressure on the Personal Consumer Expenditure Deflator, which is, by repute, the Fed's favoured inflation measure. A couple of points stood out from the data. First is quality issues. 40% of prices were imputed.
That means the price was not measured where it was supposed to be measured, and a less precise price is chosen as a substitute. A 40% imputation rate matches the record high for this level of imprecision, and it's not a great indication. Second are the political issues, with allowances for the fact that the data is less precise.
As reported, the prices that people notice are rising, even accelerating. Food consumed at home, referred to as groceries by some people, soared 0.7% on the month. Grocery price increases like that have not been experienced for some time, and that is something that strongly influences inflation perceptions, and thus a sense of an affordability crisis.
Electricity prices moved less in aggregate, but in some regions, notably the North East, they're surging. This means that the political focus on affordability is likely to continue, and voters are likely to keep ranking affordability as a top concern. China's December trade data showed additional strength in exports, measured in dollar terms.
This is not especially surprising. Outside the United States, the rest of the world is trading more or less as normal, and with new OECD consumers generally willing to spend, products that are assembled or manufactured in China will be in demand. The US-non-US breakdown needs to be treated with caution, however.
US importers are keen to avoid the fiscal burden of tariffs, and at least 20% of China's exports to the States would appear to be being rerouted via other third-party countries. US data dominates the calendar for today. Producer price inflation for November adds to the information about the personal consumer expenditure deflator.
It's also useful in assessing the extent to which US manufacturers have chosen to use tariffs as an excuse to raise prices rather than to raise market share. There will be quality issues with the data related to the shutdown for these numbers. November US retail sales figures should put in an OK showing.
Consumers have been cutting back on savings rather than cutting back on spending in order to pay for the tariffs, and that allows overall retail sales to perform OK. The shift to spending on having fun that has been in evidence in recent months may have some bearing, not because the shift is accelerating, but because the cost of having fun, at least in some categories, has been rising. Restaurant prices and airfares have leapt up recently.
If US households are determined to pursue fun, they will have to mine the fines and money from somewhere, and that might include scaling back on other areas of consumer spending. That's all for today. Have a good day.
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