A key measure of medium-term British inflation expectations in financial markets hit its highest since at least late 2013. This has potentially added to the worries at the Bank of England. Five-year inflation forwards which measure investors’ expectation for retail price inflation over the next five to 10 years had peaked at 4.0364%. This is the highest RPI rate since the data series from Refinitiv began in October 2013.
Headline RPI, which determines the return on British index-linked gilts, hit a 30-year high of 6.0% in October. Meanwhile consumer price inflation reached a 10-year high of 4.2%. The BoE has said that it expects to have to raise interest rates. This is in part to ensure that the surge in inflation, caused mostly by higher energy prices. The COVID-related supply chain problems, does not become entrenched in higher medium-term inflation expectations. The British central bank is due to announce on Dec. 16 about its raised rates.
U.S. Federal Reserve Chair Jerome Powell said that it was no longer helpful to describe inflation pressures as transitory. Other market measures of British inflation expectations reached new highs too. The break-even inflation rate on five-year index-linked gilts needed for them to outperform conventional gilts that hit 4.68%. Ten-year break-even rates touched 4.32%. The break-even rates give a clear sense of the trend in inflation expectations. They may also reflect broader market factors, such as a big reduction in the number of bond auctions announced after October’s budget statement.