The Financial Times’ irreverent (and thus more interesting than any other financial journalism) Alphaville blog reports that British inflationary expectations have blown out to extreme levels.
The spread between the yield of 30-year “normal” gilts and the yield of 30-year inflation-linked gilts – very roughly, the expectation of future inflation over the next thirty years – is now 3.91% per year. That’s every year for the next thirty years.
UK RPI inflation is currently running at about 4.2% or 4.3% per annum, easily the highest it’s been since the 1990 malaise. Is it reasonable to expect that things will stay this bad for the next thirty years, or that there’ll be another 1975-style 25%-inflation blowout?
If another blowout is on the horizon, then a 3.9% average might be right. But if you trust central banks not to screw things up, then you’d be quite happy to sell inflation at these levels – and in these days of markets in everything, you can do that. Anyone want to show me a price on 30-year sterling inflation swaps?