The inflation pricing conundrum

Fear of a spike in consumer prices has created greater demand for inflation protection from a variety of participants. This has increased the need for inflation pricing and analytics tools – but it is not as simple as tweaking existing models used for interest rates. By Clive Davidson

Inflation has long proved difficult from a pricing and analytics perspective. While their cousins in the more developed bond and interest rate derivatives markets can boast a sophisticated array of models, inflation traders have faced a number of distinctive challenges.

For a start, inflation products possess a variety of unique characteristics that have to be considered, while the market is far less liquid than nominal bonds and interest rate swaps. This means existing interest rate tools