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April 5, 2024

Goods and services inflation, leading indicators and Latin American GDP

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Karl-Philip Nilsson
Denys Liutyi
Siwat Nakmai
Hank Rainey
Jay Yang
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Monetary policy and inflation trends

This chart highlights the interplay between global monetary policy and inflation trends. Global monetary breadth refers to the share of economies with higher, unchanged or lower policy rates compared to the previous month.

As inflation moderates globally, while remaining elevated, monetary tightening has been subdued, reflecting central banks' cautious approach to navigating economic recovery since the pandemic. At the same time, there has been a noticeable shift towards monetary easing, signaling a potential transition to a more accommodative policy stance.

This pivot may be due to several factors, including the need to support economic growth against the backdrop of global uncertainty and the stabilization of inflation rates closer to targets. Most central banks are currently maintaining policy rates, taking a wait-and-see approach to balance growth and inflation risks.


Services inflation outpacing goods

This comparison of goods vs. services inflation across 20 countries highlights several marked shifts arising from the pandemic. If a cell is highlighted in color, it indicates that in that month, country goods inflation was higher than that of services.

At first, a surge in goods prices reflected supply chain disruptions and a shift towards home-based consumption. However, this trend, from around the beginning of 2021 to mid-2023, was not uniform. Countries facing economic challenges such as Germany and Japan remained in this phase longer than others including the US and Ireland, which exited relatively early.

With the reopening of economies, there has been a reversion to the pre-pandemic norm, in which services inflation outpaced that of goods. Demand for services has resumed, likely due to increased consumer mobility and the rebalancing of spending towards travel, dining and leisure activities. Meanwhile, the stabilization in goods prices suggests an easing of supply chain pressures.


The Sahm rule and US recession risk

The Sahm rule, which focuses on the three-month moving average of the US unemployment rate, underlines the possibility of an upcoming recession. The rule identifies signals related to the start of a recession, when the three-month moving average of the unemployment rate rises by 0.5 percentage points or more relative to its low during the previous 12 months. The proportion of states triggering the Sahm rule is currently over 50 per cent, significantly higher than the historical benchmark of 31 per cent associated with recessions. The concentration of layoffs in sectors such as technology, finance and services amplifies concerns about an economic downturn, reflecting sector-specific vulnerabilities.

Yet, with most states continuing to experience larger unemployment claims, also seen in the worsening breadth of US Sahm's rule across states, let’s not be overly optimistic.


India’s forward price to earnings and long-term returns

India's equity market, buoyed by expectations of robust economic growth and supportive policy measures, has witnessed {{nofollow}}soaring valuations, particularly reflected in the forward P/E ratio reaching historic highs. The inverse relationship between the forward P/E ratio and long-term equity returns suggests that investors should be cautious, however, as higher valuations may herald lower future returns. Despite this, the MSCI India Index's profitability, with a projected annualized return of more than five per cent over the next decade at a forward P/E of around 22x – albeit lower than historical norms – indicates sustained investor confidence.


UK utility bill payment failures

Tracking debit card transactions is a well-known method for gathering alternative data that can provide valuable insights into consumer finances. The UK's {{nofollow}}Office for National Statistics (ONS), in collaboration with Pay.UK and Vocalink, has taken this a step further by presenting data on failed debit card transactions in the UK relating to utility bill payments. The analysis reveals that consumers are under increasing financial stress. Failed electricity bill payments have quadrupled since 2020 to 1.2 per cent of the total, in contrast to water bill payments, where the level of failures has remained stable. This points to the disproportionate impact of rising energy costs on household finances.


Latin American GDP per capita vs. US

The economic trajectory of Latin American countries relative to the US over the last four decades indicates a general trend of stagnation or decline in GDP per capita, with traditional economic powerhouses such as Mexico, Brazil and Argentina witnessing significant setbacks. Guyana is an exception, spurred by major offshore oil discoveries expected to transform it into the world's largest per capita oil producer. In 1980, Guyana’s per capita GDP was less than 20 per cent of that of the US, whereas by the end of 2024, the International Monetary Fund forecasts that Guyana will be nearly at level pegging with the US. This transformation of fortunes underscores the impact of natural resource wealth on economic development and highlights the divergent fortunes of different countries in Latin America.

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