How the linkage works
Both the semi-annual coupon and the final redemption payment are scaled by the change in the Retail Prices Index since the gilt was issued, using a three-month lag. Hold one to maturity and you receive a known real return, whatever inflation does.
The UK was the first major government to issue these, in 1981, and the market is dominated by pension schemes with explicitly inflation-linked liabilities.
Why they can still lose you a fortune
The inflation protection applies to the cash flows, not to the market price on any given day. Linkers are priced off real yields, and the UK has an unusually long-dated index-linked market — some issues mature in the 2060s and 2070s, with duration above 30.
In 2022, real yields rose sharply. The longest index-linked gilts lost well over half their value in a year during the highest inflation in four decades. Every investor who had bought them as "inflation protection" without looking at duration discovered that they had bought a very long-duration bond that happened to be indexed.
If you hold to maturity, you get your real return. If you need the money in year three, you get the market price.
The RPI change
From 2030, RPI is to be aligned with CPIH, which has historically run lower — typically by around a percentage point. Holders of long linkers will receive a smaller uplift than the terms implied when issued, and there is no compensation. It is a useful reminder that the reference index of any indexed instrument is set by someone who can change it.
How you would actually trade it
Available through the same platforms as conventional gilts. Check the maturity date and duration before anything else — a short-dated linker and a 2068 linker are entirely different instruments with the same label.
The breakeven inflation rate — the gap between a conventional gilt yield and a linker yield of the same maturity — tells you what inflation the market already expects. Linkers beat conventionals only if inflation exceeds that, not if it is merely high.
What goes wrong
- Extreme duration on long issues; capital losses can dwarf the inflation uplift over any medium horizon.
- Real yields can rise even during high inflation, which is the 2022 lesson.
- RPI reform reduces future uplifts from 2030.
- Deflation floor. Unlike US TIPS, UK linkers issued since 2005 do not guarantee return of the original nominal in deflation.
This entry describes how a market works. It is not a recommendation, a price forecast, or advice about whether this belongs anywhere near your money. How entries are written.