UBS On-Air: Paul Donovan Daily Audio 'Benign inflation; now, what about growth?'
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Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Thursday the 16th of January. Yesterday's market moves demonstrate the problems of having a non-economist running the US Federal Reserve. The consumer price inflation data moderated and, at least until trade taxes are imposed, disinflation trends are intact.

Durable goods prices marked their 25th consecutive month of deflation. For more than half of President Biden's presidency, durable goods prices were falling. That may reverse with forthcoming trade taxes. And of course, these are not the prices that consumers care about when they consider inflation. However, falling durable prices do still increase consumer spending power.

This was overall a benign report, but the market reaction was quite abrupt. That is because of US Federal Reserve Chair Powell's insistence that policy should depend on dodgy data. That mantra, it could hardly be called a philosophy, means that markets will overreact to every data release because the assumption is that Powell will overreact to every data release.

Today, we get evidence of that great engine of growth, the US consumer, with retail sales data. This does not properly capture the trend towards spending on having fun, although there is an element of this in the restaurant spending category. This is a value measure, so those falling durable goods prices will increase the willingness to consume, but they will depress the value of the goods being sold.

Nonetheless, the expectation is for a solid number today. US consumers' spending power is enhanced by rising real incomes, meaning that at the end of the month, in real terms, US consumers have more money in their bank accounts. If a US consumer has more money in their bank accounts at the end of the month, there is practically a constitutional obligation to go out and spend it.

The Federal Reserve's Beige Book of Economic Gossip, otherwise known as anecdotal evidence, reported better than expected holiday sales. UK monthly GDP data showed a modest increase led by services, which were in turn led by having fun categories.

The monthly data is too volatile to make much of a difference to financial markets, however, though the pattern of growth is certainly not particularly consistent with the doom-laden narrative of companies sulking after being asked to pay a modest tax increase. Over in Germany, final consumer price inflation did not change in terms of the year-on-year growth rates. Finally, US Treasury Secretary nominee Besant has their confirmation hearings before the Senate Finance Committee today.

How much this matters depends on how much one thinks Besant matters. Certainly, on the issue of aggressive trade taxes, Besant's views seem to be somewhat in the background.

Besant is assumed not to think that tariffs are a good thing of themselves, only useful as a bargaining device, whereas social media posts from US President-elect Trump suggest that the incoming administration considers taxing US consumers of foreign goods to be a very good thing in and of itself.

Investors have proved very sensitive to suggestions around tariff policy, and so a benign presentation by Besant may be taken as a market positive, but it's worth remembering a single social media post could burst that idea. That's all for today. Have a good day.

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