DOES ZERO INFLATION MAKE IT A GOOD TIME TO HEDGE?

UK inflation, as measured by the Consumer Prices Index (CPI), hit zero for the first time on record in March 2015. Headlines are now focusing on the implications for the UK economy, and whether low inflation or even deflation will remain for the longer term.

Such headlines might prompt pension schemes to take another look at their inflation hedging strategies. Most schemes’ benefit payments are inflation-linked, and therefore changes in expected inflation directly impact scheme solvency. If actual realised inflation is very low, has inflation hedging become cheap? Does it appear attractive to consider inflation hedging? Such considerations have led to schemes putting inflation hedges in place to reduce funding level volatility and protect against potential future increases in inflation pricing.

This article is produced by Clear Path Analysis, 2015.