UBS On-Air: Paul Donovan Daily Audio 'Peculiar US price increases'

Paul Donovan · UBS Global Wealth Management

US CPI overstates inflation because owners' equivalent rent, which nobody actually pays, is its largest component.

Using consumer price inflation to deflate incomes is problematic because the largest part of the CPI calculation is owners' equivalent rent, a 'fantasy housing measure' that nobody actually pays in the real world. The measured inflation rate therefore contains a large imputed component that does not reflect households' actual cash costs, which distorts any real-income calculation built on it.

“Using consumer price inflation to deflate incomes is problematic, when the largest part of the consumer price inflation calculation is the fantasy housing measure of owners equivalent rent, which nobody actually pays in the real world.”at 0:33

Paul Donovan · UBS Global Wealth Management

Recent US inflation is primarily an oil price story rather than broader demand-driven pressure.

Yesterday's US consumer price data was primarily an oil price story with regards to inflation. Oil prices were the main driver of the inflation print that reinforced the broader trends in the economy, while other price pressures are narrower.

“this was primarily an oil price story with regards to inflation.”at 1:42

Paul Donovan · UBS Global Wealth Management

AI demand is a weak explanation for rising US software and computer prices; UK prices fall despite AI investment.

Higher US software and computer prices were blamed on demand for artificial intelligence. The problem with that explanation is that the UK, which is also investing in AI, has seen falling prices in these categories. So AI-driven demand does not convincingly explain the US price increases, which Donovan treats as a limited concern rather than a broad inflation force.

“Higher software and computer prices were blamed on demand for the shiny new toy that is artificial intelligence. The problem with that is that countries like The UK, also investing in AI, have falling prices in these categories.”at 2:08

Paul Donovan · UBS Global Wealth Management

US inflation breadth is narrowing, likely as tariff effects fade from the CPI calculation.

The breadth of price increases, measured by a Federal Reserve gauge that is poorly detailed, is narrowing. Donovan says this is perhaps inevitable as tariff effects fade from the US inflation calculation, implying that tariff-driven price increases had been broadening the inflation picture and their roll-off is narrowing it.

“The breadth of price increases ... is narrowing. That perhaps is inevitable as tariff effects fade from The US inflation calculation.”at 2:29

Paul Donovan · UBS Global Wealth Management

US real incomes flat since January 2025; spending growth now relies on savings drawdown and side jobs.

Real income growth is imprecise to measure because consumer price inflation includes owners' equivalent rent, which nobody actually pays. Even so, real incomes in the US have not changed in an economically significant way since January 2025. Growing real consumer spending therefore requires people to take on side hustles or second jobs, cut savings rates, or dip into their accumulated savings. Monitoring whether consumers keep drawing down savings this way is key to sustaining economic activity, and retail sales data is the next check on that process.

“it seems fairly clear that real incomes in The United States have not changed in an economically significant way since January 2025.”at 0:49

Paul Donovan · UBS Global Wealth Management

US airlines have sharply accelerated airfare increases since March, unlike their peers abroad in recent years.

US airfare growth looks dodgy. US airlines had tended to grow airfares in line with those of other countries in recent years. Since March, however, they have been raising prices at a dramatically higher rate. That divergence is evidence of profit-led inflation rather than a common cost or demand shock, which Donovan raises as a question about whether profits are feeding inflation.

“US airlines have tended to grow airfares in line with those of other countries in recent years. But since March, they've been raising prices at a dramatically higher rate.”at 1:55

Paul Donovan · UBS Global Wealth Management

Resumed Ukrainian strikes on Russian diesel refineries are unlikely to move retail diesel prices much.

Zelenskyy said bombing raids against Russian diesel refineries will resume. This does not necessarily change the retail diesel price much. Markets were not expecting dramatic price consequences from the US diesel deal with Russia either. The strikes do weaken the political narrative that the US-Russia deal was presumably meant to support.

“This does not necessarily change the retail diesel price that much.”at 2:55

Paul Donovan · UBS Global Wealth Management

UK growth is strong: August activity data beat expectations and the UK led G7 growth in H1 2026.

UK manufacturing and industrial production, and construction output, all came out stronger than expected in August. The monthly GDP number was also strong, though Donovan notes it tends not to be taken terribly seriously. The UK was the strongest growing G7 economy in the first six months of the year, a growth story that Donovan expects to keep animating those interested in UK fiscal policy ahead of the budget.

“The UK was the strongest growing G7 economy in the first six months of this year”at 3:32