UBS On-Air: Paul Donovan Daily Audio 'Snickers bars and inflation perceptions'

Good morning. This is Baldonovan Chief Economist at UBS Global Wealth Management at 7 o'clock

in the morning London time on Thursday 12 March. Yesterday's announcement that the International

Energy Agency would orchestrate the release of a record amount of petroleum from strategic

petroleum reserves has had little impact on the global oil price. News that another three

ships have been attacked in the Gulf did impact global oil prices, pushing Brent Crude over

$100 a barrel. With no coherent proposals from the United States Administration on re-opening

the Strait of Omuz, the oil price is likely to remain elevated for the near term and investors

are monitoring Iranian actions closely as being the important driver of the market. As of

Tuesday, retail gasoline prices in the United States continued to climb. Yesterday's

U.S. February inflation data was benign as to the headlines, but that will not necessarily

correspond to the lived experience or the perceptions of U.S. consumers. Owners equivalent

rent, the single largest component of the consumer price inflation calculation, is responsible

for bringing down inflation rates. But this is a fantasy price that no one pays. No one

is actually benefiting each month from a lower Oedlands equivalent rent inflation rate.

The decline in used car prices while significant, this is one area of the U.S. economy where

prices are actually falling. But even U.S. households do not buy a used car on a regular

basis. And so the overwhelming majority of the population will not be experiencing

this price decline. In terms of inflation perceptions, grocery price inflation has been

trending towards accelerating in recent months. And the price increases for individual

items can be quite startling. That matters because the affordability crisis is being talked

about very widely. And people tend to remember the price level they think something should

sell at for about 12 months. So the notably higher prices being paid today for beef,

coffee or chocolate, stick in people's minds because they think the price of 12 months

ago is the price they should be paying. The rising price of a Snickers bar is a powerful

force in inflation perception and the affordability crisis. The U.S. affordability crisis is more

perception than reality for many people and so consumption should continue. U.S. consumers

cut back on savings to afford tariffs and they can continue that strategy as they confront

higher gasoline prices in the coming weeks. There is a real reluctance to reduce spending

once it's become part of the household routine. This is why it is the duration of the war that

matters most to economic reactions. The resources are there to offset the damage to

real incomes in the short term. We have also seen Asian countries move to

introduce demand mitigating measures, working from home for instance, which as well as raising

productivity tends to be more energy efficient over time. This suggests that consumers can do more

to mitigate the effects of higher oil prices than in the past by changing demand patterns.

However, that's very unlikely to stop there being an overall negative impact.

The U.S. administration has also started tariff proceedings against the European Union and China.

This is unlikely to help U.S. consumers perceptions of the affordability crisis,

but it will take time for tariffs to be agreed and then a further delay while they are passed

through to the U.S. consumer, given the length and complexity of the modern supply chain.

U.S. imports an export date of a January has more political resonance than economic relevance

in this context. The Bank of England's Bayley is due to speak and as a central bank leader who

is actually a qualified economist, Bayley's comments on how to react to a relative price shock

in a commodity market are definitely worth listening to. That's all for today. Have a good day.

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