Tag Archives:

CPI

Markets start to think about inflation again

Over the last few weeks we have witnessed a meaningful bounce in inflation breakevens in the UK, Europe and the US. When breakevens are rising, it is a signal that the fixed income market is anticipating higher inflation than has been priced in. It also means that index linked bonds are outperforming conventional bonds. In the UK, the linker gilt of 2016 has outperformed the conventional gilt b…

Read the article

UK inflation shocking?

UK CPI inflation jumped from 4.0% to 4.5%, versus expectations of only a slight increase to 4.1%.  Core CPI, which strips out food and energy prices, soared from 3.2% to 3.7% and is now at easily a record high (data goes back to 1997).  One bank called the inflation numbers shocking, arguing other economies aren’t seeing anything like this surge in core inflation, UK monetary policy is too loos…

Read the article

Why the UK has a real rate problem

The financial crisis is resulting in the authorities, the public, and investment managers seeing things they did not expect to see. Today’s headline RPI level of 5.5% is a record 5% above the Bank of England base rate of 0.5%, resulting in a negative real interest rate (base rate – RPI) of -5%. This is the most divergent I’ve seen this in my 25 years in the city (see chart).

The bond bears th…

Read the article

Hike Rates to Stamp out UK inflation. Really?

This week RPI broke through 5% and CPI broke through 4%. The media are almost universally calling for rate hikes, politicians are starting to voice their opinions loudly, and many investors are worried.

If the market reacts to higher inflation by pricing in more rate hikes, that’s bad news for gilts and index-linked gilts.  But for investors such as us who are trading so-called breakeven strate…

Read the article

Emerging market inflation – a big risk to global growth

The reasons behind the ugly scenes in Tunisia are down to a combination of political and economic factors, but at least part of the discontent stems from rising food and energy prices.  Public unrest in Tunisia has spread to Jordan, where thousands were protesting against the government over the weekend, and demonstrations are also spreading to Egypt (10 year US$ bonds are down 4% today, and th…

Read the article

It’s not 1993-1994 in the government bond markets. Unemployment is still way too high to provoke a Fed hike. But the Bank of England might be on the brink of a policy error…


Government bonds have been selling off over the past month. Since mid October the 10 year gilt yield has risen from 2.85% to 3.63%, the 10 year bund from 2.25% to 3.00%, and the 10 year US Treasury from 2.40% to 3.40%.  The damage has been even greater in peripheral Europe – Spanish 10 year yields are up by nearly 150 bps over that same period.  Part of this reflects the return to a “risk on&#…

Read the article

UK linkers becoming stinkers

In the recent emergency UK budget it was announced that public sector indexation would change from RPI to CPI from April 2011.  Now, the government is proposing moving private sector schemes and the Pension Protection Fund (PPF) indexation to CPI too.  As Pensions Minister Steve Webb argued, it makes sense switching to CPI as it’s the measure that the BoE targets and (slightly more dubiously) C…

Read the article

Dear George…

Mervyn King introduced himself to George Osborne last night by writing him a letter, not to wish him luck in his new and frankly unenviable role, nor to advise him on just how much austerity is needed on 22nd June to keep the markets supportive of gilts, but instead to explain why he has again overseen a rate of inflation of more than 1% above the target rate of 2%. The letter states that the G…

Read the article

Don’t believe the headlines – the world’s biggest economy is booming

Financial and media commentators spent much of the second half of 2006 predicting a US housing market crash and an economic slump. True, the housing market did weaken last year, but US GDP figures out yesterday paint a completely different picture.

US GDP in the fourth quarter last year was 3.5% (annualised), the strongest Q4 number since the sizzling 7.3% recorded in Q4 1999. Looking at US GDP…

Read the article

Inflation – 2006 sector breakdown

Looking at the broad categories of the UK’s RPI numbers here’s a brief breakdown of where the inflationary – and indeed deflationary – pressures are occuring. The most recent inflation number we have is for November. The headline RPI was +3.9%, year on year.

 Components rising more quickly than average
– Fuel and Light: up 29.5% from a year earlier. Although crude oil prices were only up 11% ov…

Read the article