Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Friday the 31st of January. US President Trump reiterated their intention to impose significant taxes on US consumers of goods from Canada and Mexico from tomorrow.
Trump has hinted at not taxing US oil consumers. Several US refineries are specifically set up to handle the sort of oil produced in Canada and Mexico rather than, say, Texas. That shows a sensitivity to the inflation impact of these taxes, although Mexico and Canada may choose to restrict or tax the export of their oil supplies to the United States in response.
The immediate question is how serious investors should take any tax hike. The speed with which Trump retreated from plans to tax US coffee drinkers by taxing imports from Colombia is a reminder that unpredictability is a risk with the current administration. If the taxes do go ahead, how quickly do US consumers then face higher prices?
If oil supplies are restricted, oil prices would rise relatively quickly. Food prices would also see some swift response. Price changes for other goods will depend on how much has been stockpiled in the United States.
The full inflation effect also depends on whether US companies raise their prices in the face of less competition and how quickly profit-led inflation by retailers is established. These second-round effects might happen more quickly. Sometimes prices rise in advance of tariffs, if the narrative has been screamed loudly enough.
It's also worth remembering that a 25% tax on goods from Canada and Mexico would equate to about a 10% price increase for those goods in store. So 25% price increases should not be looked for unless profit-led inflation is very rapid Ultimately, the plausibility and duration of any taxes probably depends on the political reaction, which depends largely on consumers' perceptions of inflation and the importance they attach to that. The trade taxes are being framed in the context of controlling illegal drugs, but the price of a dozen eggs in the United States has soared since Trump's election and significantly exceeds the street price of a hit of cocaine.
In December, Canadian egg prices were rising 5%, Mexican egg prices 5.7%, US egg prices 37%. Inflation is certainly likely to form part of the market focus today. The United States is offering the personal consumer expenditure deflator alongside the regular consumption numbers.
The core PC deflator is expected to be stable in year-on-year terms, with food and fuel prices adding a bit more to the headline rate. Preliminary German and French inflation is not seen doing very much, a slight increase in the headline French rate but still to a level below the ECB's magic 2% target. German retail sales data for December was a lot weaker than six surveyed economists expected.
Whether this really constitutes a consensus is a very questionable point. However, as is now absolutely standard for German data and especially for retail sales data, the previous month's data were revised up substantially. Germany has a habit of declaring everything is terrible and then the following month suddenly saying just joking, everything was okay, but now everything is terrible.
The problem is that markets wait past revisions less than they wait the latest data, and so a pessimistic perception is likely to overwhelm the less pessimistic reality. That's all for today. Have a good day.
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