UBS On-Air: Paul Donovan Daily Audio 'Seeping taxes, suspending data'
Lead — The desk interprets the recent US consumer price inflation data as a clear indication that trade taxes are affecting domestic prices, particularly in sectors like automotive and appliances. Per the full note source, Paul Donovan from UBS details how price changes, such as the notable spike in tyre prices, signify the beginning of tariff impact on the consumer market. Given the lag in certain sectors, the overall inflation trajectory may continue to grind higher unless adjustments occur in trade policy or reporting standards. As no high-impact calendar events are imminent to alter this outlook, traders must remain vigilant in monitoring inflationary signals and market responses.
What the desk is arguing
The desk views the passing of tariff costs into consumer prices as a significant factor driving U.S. inflation higher, particularly in sectors tied closely to trade taxes. Donovan notes that while tyre prices surged and appliance prices diverge from global trends, automobile pricing remains insulated due to inventory and supply chain delays.
Supporting evidence highlights that the U.S. core goods price inflation is projected to increase, with pre-tariff inventories still dictating current prices in various sectors. The reference to significant price increases in tyres and the lack of alignment in automotive pricing suggests upcoming volatility as these dynamics evolve.
Counter to immediate concerns of inflation accelerating out of control, the expectation is that certain goods, specifically automobiles, will show delayed reactions to these trade taxes owing to logistical cycles.
Where it sits in our coverage
Our prevailing consensus target is 1.075, with a range between 1.04 and 1.12. Current forecasts from key firms include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26) - Other prominent firms continue to gauge inflation impacts on growth expectations. This aligns with jpmorgan, which anticipates moderate inflationary trends supporting a stable target slightly above the consensus.
How other firms see it
Firms such as jpmorgan appear aligned with the desk's view on inflation trends, while bofa diverges with a more conservative stance on its target and expectations of inflation dynamics playing out more slowly.
Traders should watch the dynamics in USD/CAD, which often reflects U.S. inflation pressures and the resonance of trade policies, particularly as inflation data develops through the months.
What the calendar says
No immediate events are scheduled that could influence this view significantly, keeping the focus squarely on domestic inflationary signals as the primary catalyst.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US inflation data reflects rising prices impacted by tariffs on consumer goods.
- 02Tyre prices have surged dramatically, while U.S. appliance prices diverge from global trends.
- 03Automobile prices remain insulated due to supply chain delays, limiting immediate tariff impact.
- 04Overall core goods inflation is set to grind higher unless trade policies shift.
Market implications
Traders should remain cautious about trade developments impacting inflation outlooks, particularly as it relates to USD/CAD pair movements reflecting broader economic signals. Watching for any shifts in market perception of inflation will be critical.
Risks to this view
A reversal in expectations may occur if trade tariffs are significantly altered or overturned, which could immediately affect pricing strategies in the automobile sector and overall inflation reporting. Additionally, discrepancies in consumer price inflation reporting standards could lead to adjustments in market sentiment.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's six o'clock in the morning London time on Wednesday the 13th of August. Yesterday's U.S. consumer price inflation data confirmed that tariff costs are being passed through to the U.S. consumer.
And they're being passed through with the speed and in the sectors of the economy where one would expect this to happen. Things like tyre prices shot up as pre-tariff inventory has been cleared. Banana prices have been falling globally, but rising in the United States, and rising more than the newly imposed trade taxes would justify, hinting at second round inflation effects.
U.S. appliance prices have risen since March of this year, but in Mexico, Canada, the EU and the UK, appliance prices have fallen since March, and so on. Of course, not every area of the economy will show the effects of trade taxes yet. Political partisanship has made people very eager to see taxes being passed through as quickly as possible, but there's no reason that car prices, for instance, would be showing trade taxes just yet.
It takes time to ship autos across the Pacific. Cars arriving in the United States as late as June were still free of trade taxes. It then takes about six months to get from port to deal a lot in the auto space as well.
Auto prices will be one of the last things to reflect trade taxes, and what is being sold right now is pre-tax stock. Why not raise the prices anyway? Because auto supply chains presumably think there is some chance of trade taxes being overturned by the courts, in which case the government has to pay the money back that it's taken, and the sizable price increase implied by the tariffs need not be paid.
U.S. core goods price inflation is therefore set to grind higher, always assuming that consumer price inflation is honestly reported. U.S. President Trump, of course, fired Bureau of Labor Statistics Commissioner McEntarfar, whose body of economic research has been cited 1,327 times, and nominated Antony, whose body of economic research has been cited once.
Antony has suggested that the Bureau of Labor Statistics might suspend the publication of things like labor market data because of accuracy problems. The Bureau of Labor Statistics has an obligation legally to provide monthly data, but the law does not seem to specify when that data has to be published. There are two obvious international precedents for suspending the publication of data, the UK and China.
The UK has suspended the labor force survey over accuracy problems driven by a low survey response rate. It has done so without any suspicion of political interference and has moved to improve survey response rates and has provided alternative experimental measures to help investors understand what is happening in the labor force. China's suspension or secession of economic data publications, in contrast, has just provoked speculation about what is happening in the labor market or the wider economy, often with a negative bias.
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