The surge in sovereign inflation bonds supply over the last few years and the parallel sharp development of US and European inflation derivatives markets has increased the liquidity and flexibility of inflation products. This means that corporates and financial institutions can add a new dimension – inflation – to their financial strategy and risk management.
The best-known inflation index is the Consumer Price Index (CPI). It tracks the price of a basket of goods and services (retail prices) and housing. There are other classic measures: The Gross Domestic Product deflator, the widest measure of inflation, is well correlated to the CPI; the Producer Price Index is a narrower measure mainly tracking manufacturers’ prices. Most inflation-linked financial products are linked to the CPI, except in the UK, where they are linked to the Retail Price Index, which is closely related to the CPI.
