Chart of the Month

October 2017

Market prices of inflation compensation infer that participants are relaxed about the inflation outlook. Yet, a new index produced by the New York Fed called the UIG (underlying inflation gauge) suggests otherwise. It comes in two versions: “prices only” and “full data”. Both the comprehensive measure, which includes additional variables outside of prices including the unemployment rate, bond yields and PMIs, and the “prices only” version have shown “more accurate forecasts of inflation compared with core inflation measures” according to the NY Fed. These measures suggest that trend CPI inflation is in the 2.2 per cent to 2.7 per cent range, above the Federal Reserve’s 2 per cent objective. Yellen’s choice?

September 2017

Debt Service Ratios (DSRs) – which measure the proportion of aggregate income required to meet debt obligations, including both interest payments and amortisation - have mostly trended upwards in key emerging nations. In China, the DSR for the private non-financial sector (households and non-financial corporations) was only 12.8% in 4Q 2006 compared to 20.1% in 4Q 2016. In Turkey the ratio has increased from 8.3% to 14.1% during the same period. We have expressed these ratios as z-scores which measure the number of standard deviations from the mean. Z-scores above 2 are very rare and infer a threat to financial stability. Currently, the highest z-scores are for China and Turkey, both at 1.8, and Malaysia at 1.6. The lowest is for South Africa, which is negative. The burden of accumulated debt has grown considerably over the years and some emerging economies have become even more exposed to increasing interest rates.

August 2017

Liquidity ratios (short-term assets relative to short-term liabilities) are derived from the balance sheets of different institutional sectors in the UK as presented by the ONS economic accounts data. There has been a striking increase in the liquidity ratios of the household and private non-financial sectors in the past decade. More recently, corporate liquidity ratios have surged again, possibly as a precautionary measure taken to minimise volatile business disruptions associated with the UK’s planned exit from the European Union. Household liquidity ratios have slipped back in the past year.

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