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June 9, 2022

Central bank tightening, UK income squeeze and forecasting South Korean inflation with Indicio

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Julius Probst
Arnaud Lieugaut
Patrick Malm
Karl-Philip Nilsson
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Central bank tightening

We start the week with a chart that shows how central banks globally are reacting to soaring inflation. 

It shows the change in the policy rate with the change in the inflation rate since the beginning of the year. As you can see, most central banks have started raising key lending rates as consumer prices climbed. The European Central Bank, Bank of Japan and Swiss National Bank are the notable exceptions so far – though the ECB may start some timid rate hikes this summer. 


Central bank tightening vs US economic activity

The next chart is one we have shared before but is worth tracking over time. It shows the negative correlation between US economic activity and global central bank tightening. As you can see, our central bank decision index – we created this by calculating the next balance of policy hikes against cuts from 115 central banks – indicates we can expect a major slowdown throughout the next year. 



GDP can be measured in different ways: by expenditure, production, or income. The first takes in all expenditures within an economy: consumption, investment, government spending, and net exports. 

GDI (Gross Domestic Income) measures all income within an economy: the sum of all wages, profits, and taxes – minus subsidies. 

Since any expenditure is somebody else’s income, GDP and GDI should in theory be equal. However, because of statistical discrepancies, there can sometimes be sizeable differences between the two series. 

That disparity has now widened to a record – with annualised Q1 GDP falling by -1.5% as GDP rose by 2%. It appears that while GDP is signalling a slowdown of US economic activity, GDI (and other indicators such as recent labour market figures) are sending a different message. This means we may see some large upward revisions of US GDP, as the gap between the two series will have to narrow. 


UK inflation vs wage growth

The UK is facing the biggest income squeeze in a generation. The chart below shows how inflation has outpaced nominal wage growth in the last several years. UK real wages fell for almost five years following the global financial crisis – and are falling again as inflation surges towards 10%. 


South Korean exports

As one of the world’s biggest exporters, South Korean exports are often seen as an indicator of global demand. Yet, despite a slowing global economy, South Korean exports recently picked up again, alongside imports. 

The country’s trade balance, on the other hand, has deteriorated as the global commodity price shock inflates the cost of imports. 


South Korea inflation

The following heatmap shows the consumer items in South Korea hardest hit by inflation. As you can see, the cost of food, utilities, and transport have surged the most due to rising global food and energy prices.


Global equity and bond returns

Now let’s look at the markets. 

The following scatterplot shows the relationship between annual returns for global bonds and equities since the mid-1990s. The correlation tends to be positive except during times of large macroeconomic downturns, such as those in 2001 and 2008, when equities fall but bonds rally on the back of rising interest rates.

This year is a notable outlier. Global equities are down, but so too are bonds – no thanks to high inflation rates that have led interest rates to spike. 


US equities vs bonds

Lastly, we have replicated the analysis above for the US bond market but using our core database this time. 

As you can see, the analysis for the US is quite similar to the global one. This is not very surprising given that the US accounts for more than 45% of the global equity market and the global financial conditions are highly influenced by US monetary policy. 

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