Which Inflation Rate? by Alex Saitta and Yuxin Li
So youíre going to use an inflation rate to gauge the market youíre interested in. Which one are you going to use? Which one fits your needs?
Bond yields provide a fixed coupon or income. As the rate of inflation rises, the couponís buying power declines; as the rate of inflation falls, more
goods and services can be purchased with that fixed coupon. For this reason bond yields are strongly linked to the inflation rate, and the inflation rate is of paramount importance to bond investors.
Which inflation rate, though? When talking about inflation in the context of their bond forecasts, economists often note the trend of the Consumer Price Index (CPI) excluding food and energy prices (CPIXFAE). Laymen, though, still focus on the rate of the overall CPI. Is the relationship between the yield of the 30-year bond stronger with CPIXFAE or overall CPI?