Of course, we could only be talking about the august and hallowed Bank of England, which, investors are now beginning to realize, stands about as much of a chance of successfully tackling inflation as Amy Winehouse has of not going back into rehab. Find out why the spread between the yields on index-linked government bonds and conventional gilts (yeah, it sounds dry, but it’s important) is increasingly causing alarm.

Investors are more sceptical of the Bank of England’s ability to tackle inflation than at any time since it gained independence.

In recent months, a widening gap between the yields on index-linked government bonds and conventional gilts indicates bond-market investors are willing to pay much higher prices for inflation protection. This suggests doubts about the credibility of the monetary framework as Britain enters its most inflationary period for more than a decade.

While he was the chancellor’s chief economic adviser, Ed Balls, now children’s secretary, described inflation expectations in bond markets as the “most important” test of credibility and confidence in monetary policy.

Paul Dales of Capital Economics said the gap could be the “first sign that the markets are starting to lose faith in the ability of the UK’s policymakers to deliver a low and stable inflation environment”.

Alongside rising surveys of household inflation expectations and corporate pricing intentions, economists said there was a greater risk of higher inflation returning to normal British life.

Malcolm Barr of JPMorgan said: “In every measure you look at, inflation expectations have already moved out of the range they have occupied in the last eight or nine years.”

Sensing that a loss of confidence in the UK from abroad is under way after sterling’s continued decline, Danny Gabay of Fathom Consulting said: “The ... markets believe the ‘macro policy miracle’ [since 1997] is more style than substance”.

Continue reading on FT.com

Next article » British Bankers Association: Not As Dry As You Might Think

Previous article « New Star Swings For Fences