Across Asia central banks, including PBOC Governor Zhou Xiaochuan, are expressing concerns of the inflationary risks of QE3. China has cut rates twice (June and July 2012) as growth has slowed. The RRR has been cut thrice since late 2011. To decipher the economic comments on inflation we need to be au fait with the following terms and concepts.
Core versus Headline
Headline inflation measures total inflation in the economy. Core inflation removes factors like food and energy which can experience price spikes and may thus be perceived as a more robust measure of inflation.
Relationship between Inflation and Credit
The book "An Inflation Primer" by Melchior Palyi is an interesting one with respect to bond markets. It describes the difference between inflationary and non-inflationary credit.
Investing in Inflation
It is possible to "invest" in UK inflation via the vehicle known as "index-linked gilts". These differ from "conventional" gilts in that the principal and S/A coupon payments are adjusted in line with the RPI (Retail Price Index). Gilts issued before July 2002 have their coupons calculated by the Bank of England, from July 2002 they are calculated by the UK DMO. RPI was 2.9% in August 2012.
Core versus Headline
Headline inflation measures total inflation in the economy. Core inflation removes factors like food and energy which can experience price spikes and may thus be perceived as a more robust measure of inflation.
Relationship between Inflation and Credit
The book "An Inflation Primer" by Melchior Palyi is an interesting one with respect to bond markets. It describes the difference between inflationary and non-inflationary credit.
Investing in Inflation
It is possible to "invest" in UK inflation via the vehicle known as "index-linked gilts". These differ from "conventional" gilts in that the principal and S/A coupon payments are adjusted in line with the RPI (Retail Price Index). Gilts issued before July 2002 have their coupons calculated by the Bank of England, from July 2002 they are calculated by the UK DMO. RPI was 2.9% in August 2012.
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