Following from recent posts from over here in which GS and dealtn, discussed Break even inflation I decided to spend some more time researching what this means. I imagine that I have got the wrong end of the stick, since I don't really have any decent books on this subject and all I know so far is from attempting to interpret the above two fools' posts and internet reads.
dealtn wrote:By comparing the nominal yield and the real yield of conventional gilts and index linked gilts you get an approximate market based inflation rate. It's approximate for a number of reasons. Firstly it is unusual to get exact matches of redemption dates on the gilts, so the simply derived difference lacks accuracy. Secondly you need to adjust for the credit curve of the issuer, which is usually negligible, but even for the UK government is non-zero. Thirdly the "yield" on index linked gilts does have some assumptions in its calculation (which aren't strictly speaking comparable between
So I decided to get some more information from the BoEs yield curve webpage by downloading the "latest yield curve data". This was a zip with the following contents:
'BLC Nominal daily data current month.xlsx'
'GLC Inflation daily data current month.xlsx'
'GLC Nominal daily data current month.xlsx'
'GLC Real daily data current month.xlsx'
'OIS daily data current month.xlsx'
Being slightly bewildered I took guess and looked at the 9/9/2021 figures from 'GLC Nominal daily data current month.xlsx' and 'GLC Real daily data current month.xlsx'. (Am I in the right ball park there?).
Since the earliest common data samples found in the above related to the periods 2.17 - 5.0 years maturity that was what I graphed using this formula for BE inflation, as below:
EDIT: I obtained my "nominal yield of conventional gilts" from the 'GLC Nominal daily data current month.xlsx' and "real yield of ILGs" from 'GLC Real daily data current month.xlsx.
So is what I have done above remotely correct? I read the BoE speil, i.e. that the datas are zero coupon rates (YTMs) and I used the short end spot prices. Hence between 3.8 - 4.0% in the BE inflation curve. I didn't know the difference between BLC, GLC and OIS xlsx files, alas.
old style 8 month lagged linkers and new style 3 month lagged linked linkers).
Nor this, unfortunately.
Importantly though, if you want to look at inflation expectations for future time periods (rather than the average over the time up to that period) which is more useful), you need to analyse the future inflation curve, not the breakeven curve itself.
Would that be found in the 'GLC Inflation daily data current month.xlsx' spreadsheet?