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Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management.
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It's 7 o'clock in the morning London time on Monday 9 March.
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South Korea has imposed a price cap on domestic petrol prices in the wake of recent oil price
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Brent and West Texas crude oil prices are already over $100 a barrel.
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While the G7 is reportedly considering the use of its strategic petroleum reserves,
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US reserves are around 60 percent of previous levels, and reserves obviously can only
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help for a limited amount of time.
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South Korea's early action to cap prices is a reminder that the oil price move is not
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automatically an inflation or a growth shock.
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It can be a fiscal stimulus.
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Effectively, the Korean government is providing a fiscal stimulus to exactly offset the growth
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drag of higher energy prices, and in doing so will prevent inflation from coming through.
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China, with oil reserves three times those of the United States and a rapid expansion
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of its renewable energy program, also has mechanisms that could offset the growth and
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In time, European countries may also look to use some form of price cap, and the expansion
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of renewable energy capacity has the potential to blunt some of the effect of higher oil prices
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at least relative to history.
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In the United States, price controls seem less likely.
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As of Saturday, average retail gasoline prices were up 23 percent from their lows of this
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The economic damage of that price level is not too great.
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Gasoline prices were above this level in the summer of 2024, for instance.
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The perception of inflation is likely to be more significant.
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At current levels, gasoline prices are around 12.5 percent higher than they were in January
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Food at home, sometimes referred to as grocery prices, are only up 2.2 percent.
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However, within that category, it's things like beef prices, up 15 percent since January
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25, or coffee prices up 18 percent, that consumers tend to remember.
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The national average 6.3 percent rise in electricity prices also disguises some far bigger increases
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in some parts of the country.
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These prices are what dictate the sense of an affordability crisis.
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It's not at this stage enough to change actual consumer behavior, hence the fairly decent
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showing in the January retail sales figures.
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It is something that will change sentiment, moving it further away from economic reality,
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and that has political relevance.
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The New York Fed's one-year inflation expectation survey for February is likely to capture some
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of this inflation perception, though of course not the recent gasoline price moves.
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Inflation expectations will also be overload with political bias.
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However, inflation expectations only actually matter if people act on them.
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That is to say, if consumers change their consumption behavior or employees successfully
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increase their wage demands.
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If neither of those things happen, then inflation expectations are just meaningless noise in terms
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The attention that is paid to them is probably excessive and the legacy of the economic structures
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of half a century ago, which was a time when inflation expectations were very influential
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in things like wage setting.
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In Germany, the CDU of Chancellor Merz failed to win a state election in Baden-Württemberg
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with the Green Party narrowly coming in first place.
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The far right alternative for Deutschland increased their support, too.
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There is a tendency in global news reporting to increasingly favour negative stories and
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to sensationalise bad news creates more clicks and sensationalism sells.
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This may create a higher hurdle for incumbent governments as perceptions continue to be more
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negative than reality.
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German factory orders data and industrial production data for January were both weaker than expected,
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factory orders especially so.
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However, before embracing the dark side and getting all pessimistic, it's worth noting
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that since last January, German factory orders have been revised higher on 11 occasions and
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revised lower on only 3.
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This does hint at the possibility of a more optimistic revised interpretation of the state
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of the German factory sector.
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As all for today, have a good day.
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