UBS On-Air: Paul Donovan Daily Audio 'Up and down'

Paul Donovan · UBS Global Wealth Management

Tariff effects fading from US inflation is less visible than hoped, with evidence only in selected areas.

A reason the October consumer price reading came in above expectations was that the ending of tariff effects on inflation was not as visible as hoped. There was some evidence of tariff effects falling out in the data details, but only for selected areas. The precise timing of tariff price pass-through was hard to calculate last year, so the timing of it falling out of the calculation is also problematic. Producer price data, which captures prices higher up the supply chain, may offer more evidence of this.

“The ending of tariff effects on inflation was not quite as visible as had been hoped. There was evidence in the data details, but only for selected areas.”at 0:22

Paul Donovan · UBS Global Wealth Management

Surveillance pricing undermines the inflation concept and feeds a scapegoat narrative, though evidence is not yet clear.

The New York City Council is banning surveillance pricing, which economists call first-degree price discrimination, where buyers of the same product at the same time pay different prices based on their estimated willingness to pay. Modern technology, especially online retail, lets this reemerge. This undermines the concept of inflation as currently calculated, which assumes a single price charged to everyone. It is hard to identify, prove and prosecute. It keeps alive suspicion of price gouging and profit-led inflation, which matters for markets given the anger seen at the midterm elections. Donovan notes this is not necessarily evidence at the moment, but it makes a convenient scapegoat for the US affordability crisis.

“First degree price discrimination increasingly undermines the very concept of inflation, which, as currently calculated, relies on a single price being charged to everyone.”at 2:46

Paul Donovan · UBS Global Wealth Management

US diesel prices remain astonishingly high, up about 75% from prewar lows, and will lift producer prices.

US diesel prices are up almost 75% from prewar lows earlier this year and still persist. Unlike consumer price inflation, which includes diesel only indirectly through transport costs, producer price data includes diesel as a direct price component. So the producer price inflation reading will be affected by these high diesel prices, which is why October PPI is expected to show higher prices, with oil leading the way.

“The producer price inflation will be affected by the astonishingly high diesel prices that persist in The United States. Diesel prices are up almost 75% from prewar lows earlier this year.”at 1:04

Paul Donovan · UBS Global Wealth Management

Hawkish Fed rhetoric may reassure rather than signal a deliberate recession to tame supply-shock inflation.

New York Fed President Williams sounded relatively hawkish, saying inflation is too high and there is more work to do, and earlier Fed Governor Warren's rhetoric has also been strong. The question for investors is whether this is meant to reassure people that the Fed knows inflation is a problem, or whether the Fed is moving toward causing a non-oil recession as the only way to bring down a supply-shock-led inflation episode. Donovan hopes it is the former.

“The question for investors is whether they are saying this to reassure people that the Fed knows inflation is a problem, Or are they actually moving towards causing a non oil recession as the only way to bring down a supply shock led inflation episode?”at 3:51