UBS On-Air: Paul Donovan Daily Audio 'Inflation fantasies'

Paul Donovan · UBS Global Wealth Management

US CPI data is increasingly guesswork, and October 2026 year-on-year inflation cannot be accurately calculated.

The Bureau of Labor Statistics has cut the number of cities used to survey prices in a cost-cutting move, and some inputs into the inflation calculation have been abandoned, so more of the data comes from estimation. The 2025 government shutdown means no inflation index was calculated in October 2025, so there is no base for an accurate year-on-year October 2026 comparison. Today's release is therefore more problematic than usual.

“more and more of the inflation data has come from guesswork ... there can be no accurate year on year inflation calculation in October 2026, because there was no inflation index calculated in October 2025.”at 0:26

Paul Donovan · UBS Global Wealth Management

Consumers feel inflation is higher than reported because frequent purchases like gasoline dominate their perception.

Consumers focus on high-frequency purchases, so prices such as gasoline carry disproportionate weight in how they perceive inflation. Because official data understates their own experience, the perceived inflation rate sits above the reported one. This gap between perception and reality is what drives the affordability debate.

“consumers are likely to feel that the inflation data understates their own experiences. The focus of consumers on high frequency purchases means things like gasoline prices carry disproportionate weight in the perception of inflation.”at 1:08

Paul Donovan · UBS Global Wealth Management

Current inflation stems from temporary energy and tariff shocks; no wage-price spiral or structural inflation is emerging.

The current episode is driven by a one-off energy supply shock from the Gulf War, which arrived as the earlier one-off tariff shock was fading. Despite four years of one-off shocks (pandemic supply disruption, Russia's invasion of Ukraine, US tariffs and now the Gulf War), underlying pressures such as the risk of a wage-price spiral have not emerged. Second-round effects are absent, which points to an absence of structural inflation tendencies and a relatively benign underlying picture. The global picture is largely the same.

“The underlying drivers of this inflation episode are a one off energy supply shock ... In spite of four years of unfortunate one off shocks to inflation, underlying inflation pressures, in particular the risk of a wage price spiral, have not emerged.”at 1:36

Paul Donovan · UBS Global Wealth Management

Trump's signal that Iran strikes are unlikely keeps oil lower, but supplies have not normalised, so the reaction is moderate.

Trump's reiteration that strikes against Iran would be highly unlikely has helped keep oil prices lower. The market reaction is only moderate because there is a difference between de-escalating the conflict and normalising oil supplies. Lower escalation risk eases prices, but the supply situation has not returned to normal.

“US President Trump's reiteration that the strikes against Iran would be highly unlikely has helped to keep oil prices lower. There is a moderate reaction because there is a difference between not escalating the conflict and normalizing oil supplies.”at 3:05