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Beware of misinterpreting the fall in UK inflation compensation

A generous interpretation of the recent plunge in inflation compensation in the UK is that it has reflected confidence in the Bank of England’s commitment to tighten monetary policy by as much as it takes to ensure price stability, even if it has had to step in for a while to support the Gilt market in the wake of the government’s fiscal plans. (See here.) A less charitable assessment is that the plunge has primarily reflected the relative illiquidity of index-linked bonds and the Bank’s initial decision not to include them in its temporary purchases.

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