UK inflation last week came back to the BoE’s target for the first time since 2009.  This should most certainly be a boon for consumers whose average real incomes have been negative for several years.  However, our UK Future Inflation Index, which gives a reasonable 6 month lead on the direction of UK inflation, is forecasting that inflation should start to head back up in the summer.  This would not be a surprise given the surge in UK house prices over the last year or so.  UK inflation linkers should outperform gilts this year.



The BoE’s extremely loose policy of recent years led to 5y5y real rates becoming unprecedentedly negative (apart from a brief dip in the crisis).  As inflation eases and rates rise, these are now positive again.  Other real rates are also moving higher.  We have raised flags in the past about the durability of the UK recovery, and we are not convinced the economy will be able to sustainably deal with positive real rates.