UBS On-Air: Paul Donovan Daily Audio 'Disinflation (not in the US)'
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Good morning. This is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 6.30 in the morning London time on Friday the 27th of June. The data calendar today is focused on inflation or perhaps rather disinflation. Outside of the United States, disinflation is the trend to watch and underlying disinflation forces have already encouraged the European Central Bank and the Bank of England to reduce interest rates.

Overnight, Japan published the June Tokyo consumer price inflation data, which exhibited a little more disinflation than had been anticipated. Indeed, using the international standard definition of what core inflation is, the Tokyo core inflation price measure grew at 1.8% year over year.

Japan's May retail sales data was also a little below expectations, although in fairness, the consensus expectation does not do a very good job of predicting that particular number. A single inflation print is not, or should not be, a reason for change in the narrative of the Bank of Japan, but it might increase the focus of policymakers on just what is driving inflation and how sustainable those inflation forces are.

A lot of the headline rate in Japan is due to non-fresh food. And that suggests a relative price change rather than an underlying broad inflation pressure. Over in the glittering wonder that is the euro, we have French and Spanish June flash consumer price inflation estimates. These are seen more or less stable for the month. But again, the question is what is happening to the underlying momentum?

Goods prices are comfortably in deflation territory in France and barely have a positive rate in Spain. That, of course, reflects expectations of the coming US economic slowdown. It also reflects some of the ongoing shift in consumer priorities away from spending on goods towards spending on having fun.

In the United States, however, the story is skewed towards inflation rather than disinflation. We get the May consumer spending data, which is of some note given that this is a post-trade tax figure. There was consumer front-running of durable goods purchases ahead of the imposition of trade taxes. That tended to be focused on Democrat consumers, with Republican consumers not noticeably bringing their durable purchases forwards.

Distortions to consumer spending will be selective, therefore. Accompanying this data, we have, of course, the US personal consumer expenditure deflator. The expectation is for an uptick in both the headline and the core inflation rates. The direct effects of trade taxes will still not be in this data. That's not likely to show up in full force, at least for another couple of months.

But the details of the data can be quite telling. What is of concern here is not just the direct effect of the Trump trade taxes, but the indirect or second round effects. The greater the second round effects, the more difficult monetary policy setting in the United States will become. US Trade Secretary Lutnick has declared a trade agreement has been signed with China.

markets do not care because this is simply codifying the agreement that was made in Geneva and reaffirmed in London, and so this whole thing is in the price already. Lutnick also declared that 10 trade deals are imminent, although there is no word on whether that includes a deal with the penguins of the Herd and MacDonald Islands. 10 is not quite the same as the 90 deals that were initially promised, and the markets are likely to be cautious about this overall.

The volatile nature of US policymaking means that a deal signed today may not be in operation tomorrow. Markets' trust in the longevity of deals is not especially high. If there are deals, what will be of interest is what the baseline trade tax ends up being.

The working assumption is that the effective tariff rate that will hit US consumers is going to rise from the historic norm of below 2.5% to something around 15%. Baseline tariffs in trade deals will offer some confirmation of that shift. That's all for today. Have a good day.

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