Category Archives:

inflation

The 2nd largest bailout in British history and its economic effects

The Slavery Abolition Act of 1833 formally freed 800,000 Africans who were then the legal property of Britain’s slave owners. What is less well known is that the same act contained a provision for the financial compensation of the owners of those slaves, by the British taxpayer, for the loss of their “property”. The compensation commission was the government body established to evaluate the cla…

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CPI wHat?

In the UK, as of next month the official measure of consumer prices will become CPIH, with the H standing for housing.  As at today, the only difference between CPI and CPIH is the inclusion of owner-occupied housing in the latter, on a rental equivalence basis (“how much would it cost to rent the home I own?”, a similar measure to the Owners’ Equivalent Rent component of US CPI), which has a w…

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Five observations about Inflation

1. We are at the point of peak oil pass through: January and February 2016 saw oil prices reach their lows ($34.25 Brent January 20th and $26.21 WTI, February 11th), so this week’s inflation numbers will see some high year-on-year oil price base effects, as will February’s. This is one of the main reasons why we have been seeing significant rises in inflation in recent months.

2. The upward mar…

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Where is UK growth going to come from? Our take on the IFS Green Budget

The IFS (Institute for Fiscal Studies) Green Budget hit the headlines last week with its forecast that, over the course of this parliament, the UK tax burden is set to rise to its highest level in 30 years. The IFS has calculated that by 2020 the proportion of national income raised through taxes will increase to 37%.

I was at the presentation, and the more concerning issue for me was the rathe…

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It’s Halloween. Here are some scary charts.

The financial world is a scary place. Debt, disinflation and deteriorating growth have plagued investors over the past year, plunging bond yields into negative territory in a number of countries. Perhaps most frighteningly, it is now eight years since the financial crisis and central banks in the developed world continue to employ an ultra-easy monetary policy stance. With government bond marke…

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Real gilt yields have outperformed

The rise in UK inflation expectations since Brexit

I wrote ahead of the UK referendum that I felt front end index-linked bonds were a good way to play the uncertainty surrounding the result, given the fact that they have crucial non-binary hedge characteristics. Since the result, breakevens (i.e. the market’s expectation of future inflation) have behaved exactly as expected, rallying. The chart below shows how nominal yields have collapsed to r…

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Will the €500 note trade at a premium or discount once the ECB stops printing them? The poll results are in…

Earlier this week Richard Woolnough wrote a blog about negative rates and tax on interest.  In it he also suggested that once the ECB stops printing the €500 note and ends issuance of its existing notes at the end of 2018, the legacy notes will trade at a premium.  The argument is that because the notes will remain legal tender across the Eurozone, demand for a note with the lowest storage cost…

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Negative rates – a tax on saving? Don’t forget about actual tax

There has been much discussion recently that by introducing negative rates central banks are effectively taxing savings. This is self-explanatory, and is one of the criticisms of how negative rates can distort economic behaviour. This however is not a new phenomenon.  Let’s not forget that money has always been effectively clipped by the traditional enemy of savers – inflation. Fortunately, hol…

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US inflation expectations are rising fast, but inflation is rising faster

2015 saw global inflation risk premia collapse, led by the developed world. US, UK and European annual inflation rates spent most of the year at or around zero with numerous dips into negative territory. Short dated breakevens correspondingly fell to levels that we last saw during the financial crisis (well, to be fair, they went far lower back then, but we are still at crisis levels today), an…

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The new wedge in US inflation linked bonds

The new wedge in US inflation linked bonds

There has long been a well-known ‘wedge’ in the UK index linked bond market, since the bonds pay RPI and the Bank of England targets CPI. The wedge is the difference between these two price indices, and over the long term is thought to be approximately 1%. So over the long term, and with all sorts of caveats, RPI will be around 1% higher than CPI. The reasons for the wedge are essentially that …

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