Deutsche Bank launches first index to trade US core inflation

Reuters: Deutsche Bank said on Tuesday that it has launched the first tradable index based on U.S. core inflation, as expectations of further stimulus from the Federal Reserve increase demand for inflation-protected products.

Core inflation measures are closely watched by the Federal Reserve and are seen as a better indicator of long-term inflation than headline figures, as they remove volatile food and energy moves, which can obscure real price increases.

Thus far most of the market has concentrated on headline inflation as this is the reference rate for U.S. Treasury-Inflation Protected Securities. These bonds pay returns that are linked to headline CPI numbers.

“It makes sense to look at core inflation because it’s a better reflection of persistent underlying inflation, and accordingly something the Fed focuses on,” said Allan Levin, head of inflation trading for North America at Deutsche Bank.

“Energy tends to be much more influenced by external factors and it’s extremely volatile, therefore headline inflation tends to be volatile,” he added.

Tepid growth and stubbornly high unemployment has increased expectations that the Fed will launch additional stimulus in a bid to boost growth and reduce the jobless rate.

As Fed attention focuses on employment, however, some also see the risk of inflation jumping as more likely. Thus far, inflation has stayed within the Fed target range of around 2 percent per annum. Investors can pay or receive core inflation using swaps based on the Deutsche Bank index, and pay or receive a fixed rate in return.

The index implied core inflation of 1.6 percent over the next year, as of August 16.