Sep 16, 2026 · 7 min

Central banks confront a chain of external inflation shocks

UBS On-Air: Paul Donovan Daily Audio 'A series of unfortunate events'

The episode examines whether policymakers can offset repeated one-off price increases without suppressing healthy underlying demand.

3 key takeaways

1Central banks have faced successive external shocks from supply disruptions, war, tariffs, and conflict since the pandemic.
2One-off price increases differ from underlying inflation, making broad monetary-policy responses difficult to calibrate.
3Offsetting every shock with deliberate deflation elsewhere could create unnecessary economic damage.

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Paul Donovan’s central challenge to policymakers is whether offsetting every one-off price increase requires deliberately creating deflation elsewhere.

The brief

Paul Donovan surveys the inflation shocks that have confronted central banks since the pandemic, from supply-chain disruption and war to tariffs and conflict in the Gulf.

The central tension is whether policymakers should deliberately create deflation elsewhere to offset repeated one-off price increases.

Donovan distinguishes these external shocks from generally benign underlying inflation, while also separating them from profit-led inflation.

The episode’s broader warning is that treating every temporary price surge as persistent inflation could make monetary policy itself a source of avoidable weakness.

What was said on this episode

16 statements · 5 positive · 8 negative · 3 neutral

Paul Donovanon InflationPositive0:34
Underlying inflation has generally remained benign since pandemic shocks.
“Underlying inflation has generally been benign.”
Listen at 0:34
Paul Donovanon Interest-rate increasesNeutral1:53
Higher interest rates will not affect energy-driven inflation.
“raising interest rates will have no... effect on inflation which is energy price driven”
Listen at 1:53
Paul Donovanon Interest-rate increasesNegative2:08
Raising rates would hurt indebted consumers and companies without reducing inflation.
“this policy would just be a gesture but it's one that would hurt indebted consumers and companies”
Listen at 2:08
Paul Donovanon Federal ReserveNegative2:21
A Fed decision not to hike would create a market surprise.
“if the fed does not hike Walsh's inability to guide markets will create a surprise.”
Listen at 2:21
Paul Donovanon Federal ReserveNegative2:33
Not hiking would damage Federal Reserve credibility.
“the credibility of the Federal Reserve will be damaged.”
Listen at 2:33
Paul Donovanon Central-bank credibilityNegative2:36
Lost central-bank credibility can take years to regain.
“Credibility, once lost, can take years to regain.”
Listen at 2:36
Paul Donovanon Federal ReservePositive2:53
The Federal Reserve will probably raise interest rates today.
“it seems likely, though not certain, that the Fed will raise rates.”
Listen at 2:53
Paul Donovanon Federal Reserve rate increaseNegative2:59
Raising rates would still be a policy mistake.
“But it's still a mistake to do so.”
Listen at 2:59
Paul Donovanon UK underlying inflationPositive3:12
UK underlying inflation pressures were weaker than expected in August.
“Underlying inflation pressures looked a little more subdued than expected.”
Listen at 3:12
Paul Donovanon Inflation forecastingNegative3:44
Energy-price volatility makes current inflation forecasting more difficult.
“This does make forecasting the inflation rate right now a lot more problematic”
Listen at 3:44
Paul Donovanon Coke and refined petroleum pricesNegative3:49
Coke and refined petroleum prices rose 49.1% year over year.
“with coke and refined petroleum prices rising 49.1% year over year.”
Listen at 3:49
Paul Donovanon US August retail sales dataNeutral4:14
US August retail-sales data will likely be overshadowed by the Fed's dilemma.
“The United States will be delivering August retail sales data, which is likely to be overshadowed by the Fed's dilemma”
Listen at 4:14
Paul Donovanon US consumer demandPositive4:23
US demand is expected to remain at reasonable levels near term.
“the expectation is for reasonable levels of demand.”
Listen at 4:23
Paul Donovanon US consumer demandPositive4:27
US consumer demand is unlikely to be a near-term problem.
“Demand in the States is not likely to be an issue in the near term.”
Listen at 4:27
Paul Donovanon US consumersNeutral4:37
US consumers can further reduce their monthly savings rate.
“the US consumer, who still has the ability to trim their monthly savings rate further.”
Listen at 4:37
Paul Donovanon US consumer resilienceNegative4:47
US consumer resilience is more vulnerable than that of other advanced economies.
“the US consumer's resilience is more vulnerable, having been subject to more shocks, than is the resilience of other advanced economy consumers.”
Listen at 4:47

Statements are attributed to the speaker as said on the episode and reflect their view at the time, not PodLume's. They are not advice.