UBS On-Air: Paul Donovan Daily Audio 'Shell shocked'
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Good morning, this is Paul Donovan, Chief Economist at GBS Global Wealth Management. It's seven o'clock in the morning London time on Wednesday the 15th of January. US December consumer price inflation is due. The consensus is looking for a modest increase in the headline rate and general stability in the core rate.

Some of this headline move will doubtless be down to the price of eggs. In yesterday's producer price data, wholesale egg prices rose 127.9% year over year and now appear to be rivaling illicit drugs in their price status. The price level is not far off the all-time high of 2022. This is a reminder that price increases are not quite the same thing as inflation.

Inflation is a general increase in prices caused by an imbalance in the economy. Egg price increases are a relative price increase caused by an industry-specific supply shock. There is little US Federal Reserve Chair Powell can do about egg prices, short of becoming a poultry farmer. There may be some economists who feel Powell might make a better poultry farmer than a Fed chair, but that's a different issue.

Otherwise, market prices are generally presenting a benign picture on inflation. Owner's equivalent rent, the fantasy housing price that no one actually pays, is still likely to add to both the headline and the core inflation rates. US President-elect Trump declared that an external revenue service would be created.

This has a number of market implications. First, Trump's social media post was a clear admission that US citizens will pay all of the trade taxes that are proposed. This is due to the Oxford comma. Trump declared that the service would collect tariffs, duties, and all revenue that comes from foreign sources.

Second, this again emphasises that tariffs seem to have a different status in Trump's second term compared to their first term. Tariffs seem to be more than a mere bargaining tactic. Third, this shows the challenge of single-issue politics. Trump has a number of single issues – trade taxes, deregulation, reducing the government debt –

Here, they come into conflict as an external revenue service would duplicate the work of the rather long-established customs service by charging US consumers trade taxes, adding to bureaucracy and adding to government costs.

UK headline and core consumer price inflation data for December rose by less than the market had expected, and the number is increased by the artificial housing measure of owner-occupiers cost, although this is less of a break from reality than is the US owner's equivalent rent measure. Housing is now the biggest driver of UK inflation.

Price discounting in the goods sector, which stimulated consumer demand to the end of the year, formed part of the disinflationary force. This data does suggest that the pessimistic narrative around the UK at the moment might owe a little more to disgruntled businesses trying to bow mouth the economy and the government than it does to actual economic reality.

Producer price inflation was also lower than expected, as were retail prices. Retail price inflation is an unreliable statistic, but for now it determines the cost of index-linked borrowing. From Europe, Spanish final consumer price inflation for December is not going to excite anybody, as final numbers rarely change. There are more ECB speakers as well, but investors have pretty much got the message on the ECB. That's all for today.

Have a good day.

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