UBS On-Air: Paul Donovan Daily Audio 'The wider politics of price rises'
UBS Chief Economist Paul Donovan argues that US January CPI will be largely unaffected by Trump's trade taxes, as tariff effects typically lag by months. The desk emphasizes that year-on-year rates are expected to remain static, and food prices—especially eggs—are a politically sensitive driver of inflation perceptions, not core policy. Consensus aligns with a near-term neutral view on USD crosses, though the egg/avocado angle may constrain tariff aggressiveness on Canada and Mexico.
What the desk is arguing
Per the full note [UBS On-Air], Paul Donovan contends that US January CPI data, due Wednesday 12 February, will show little impact from President Trump's trade taxes. He notes that while anticipation of tariffs can occasionally raise prices, the actual inflation pass-through takes months—unless tax hikes are very aggressive, none of Trump's policies will affect first-quarter inflation.
The desk highlights food prices as a disproportionate driver of consumer inflation perceptions. Donovan cites egg prices approaching the street price of two hits of cocaine as a vivid example of how border and cost-of-living issues intertwine. He argues that visible food inflation, such as higher avocado costs from Mexican imports, may restrain tariff actions on Canada and Mexico, pointing to Trump's recent retreats in areas with clear inflation consequences.
What the calendar says
No high-impact US events appear on the calendar in the 30 days following this commentary. The next key data point is US CPI itself, which is expected to confirm a static year-on-year rate. Without a near-term catalyst, the market may remain focused on tariff headlines and their delayed inflation implications.
Key takeaways
- 01US January CPI expected static year-on-year; Trump trade taxes unlikely to show up for months.
- 02Food prices, especially eggs, are politically sensitive and may constrain tariff aggressiveness on Canada and Mexico.
- 03UBS sees no near-term inflation catalyst from Trump policies unless tax hikes are very aggressive.
- 04Avocado prices tied to Mexico tariffs could agitate Gen Z voters, adding political pressure.
Market implications
Watch USD/MXN and USD/CAD for tariff-reversal volatility; any escalation on Mexico or Canada food imports could weaken the dollar. USD/JPY may trade on broader risk sentiment rather than direct inflation readings.
Risks to this view
A surprise jump in January CPI core components could force the Fed to delay easing, strengthening the dollar. Aggressive tariff announcements before Q2 would accelerate inflation pass-through, invalidating the desk's timeline.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Wednesday the 12th of February. Today we get US January consumer price inflation data, which might prompt a certain amount of excitement.
The actual numbers perhaps matter a little less than the perception of the numbers, and this has become a highly partisan issue. US President Trump, at least in part, won the election in the aisles of Walmart, or former US President Harris lost the election there, depending on your perspective. Today's data is expected to be largely static in terms of the year-on-year rates.
This will not generally reflect the effects of any of the Trump taxes on trade, of course, although in the past anticipation of tariffs has sometimes pushed up prices. But the trade taxes are not generally likely to show up in consumer price inflation for some months. Indeed, none of Trump's policies are likely to be visible in inflation during the first quarter unless the tax hikes are very aggressive.
One thing to pay attention to, though, is food prices. This is more than the price of eggs, although the price of a dozen eggs is approaching the street price of two hits of cocaine, a ratio that rather neatly captures US voters' focus on the border and the cost of living. Trump can do nothing about the price of eggs, and neither can US Federal Reserve Chair Powell.
However, food prices are a disproportionately visible manifestation of inflation. Consumers dramatically overweight the price of food in their inflation perceptions. If eggs and other food prices increase, this may act as a restraint on taxing imports from Canada and Mexico as food suppliers.
A tax on consuming goods from Mexico would push up the price of avocado on toast in a way calculated to agitate Gen Z. Trump's four tariff retreats in the past couple of weeks have all been in areas where there would be very visible inflation consequences. So inflation visibility in general probably has quite an influential role in other policy areas.
Powell testified to the Senate yesterday and signalled that there was no rush to change rates in the United States. This is not as influential a pronouncement as it might first appear, partly because Powell has never set out a medium-term policy framework, and partly because markets are just being buffeted by shifting probabilities around trade taxes. Powell was questioned over things like Fed independence, which would be very important to broader issues like the role of the dollar as a global reserve currency.
A lot of this depends on whether the rule of law holds in the United States, particularly with regard to the Federal Reserve. If international investors doubt that, and international perceptions may differ from U.S. perceptions, then assurances of independence carry rather less weight. The European calendar is pretty quiet.
The Bank of England's green is speaking, which might be of some interest. Italian industrial production is likely to pass unnoticed by investors. That's all for today.
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