What's going on?

Inflation looks like it�s going up and government bonds, especially in the UK and US, are going down in price (partly) as a result. Huh? Why? Read on�

What does this mean?

On Friday, the heads of central banks in the US and UK made separate but similar comments regarding inflation. They both suggested that, if inflation were to rise, they would not act quickly to try to dampen it by, for example, increasing interest rates (click here for a primer on the link between inflation and interest rates).


Bonds are called �fixed income� investments for a reason: they pay their investors a fixed amount of interest (a.k.a. income) every year. If prices for things in the economy are rising quickly, then it makes sense that a promise to pay a fixed amount of money in future years would be worth less (because that money won�t be able to buy as many goods in the future). As a result, as higher inflation looks more likely, bonds tend to go down in price.

Why should I care?

For you personally: The drivers behind inflation are very different, depending on where you live.
In the UK, the steep selloff in the pound after the Brexit vote is almost certainly going to lead to higher prices for imported goods, which means people will be paying more for things like groceries. In the US, higher inflation has been more naturally generated: for example, as more jobs have been created, wages have increased, which has pushed up the prices of things. The American situation is much better for most consumers!


The bigger picture: Bonds could be selling off partly because governments are preparing to increase their spending.
There is a burgeoning belief, especially in the UK, but also in the US and elsewhere that governments will increase their spending to try to boost their economies. If this strategy is successful, then economic growth will improve, which would lead to more inflation (and that�s bad for bonds!).