Inflation index

A reference inflation index for the pricing of products already on the market should be defined or established as a reference for price regulation. 

Remer DS, Mattos FB (2003) Cost and scale-up factors, international inflation indexes and location factors. International Journal of Production Economics 84 1-16... 

Using an inflation index of the property damage in 1995 dollars, the total property damage was 80.8 million. [10]... 

Because the cost literature reports equipment costs for some time in the past, we must correct the costs for inflation. We can calculate the present value of cost of equipment, Cj, using an inflation index, I, as given by Equation 2.9. 

After writing mass balances, energy balances, and equilibrium relations, we need system property data to complete the formulation of the problem. Here, we divide the system property data into thermodynamic, transport, transfer, reaction properties, and economic data. Examples of thermodynamic properties are heat capacity, vapor pressure, and latent heat of vaporization. Transport properties include viscosity, thermal conductivity, and difiusivity. Corresponding to transport properties are the transfer coefficients, which are friction factor and heat and mass transfer coefficients. Chemical reaction properties are the reaction rate constant and activation energy. Finally, economic data are equipment costs, utility costs, inflation index, and other data, which were discussed in Chapter 2. 

All costs are U.S. Gulf Coast basis, January 2006 (CE index = 478.6, NF refinery inflation index = 1961.6). 

Prices change with time. However, because of the development of inflation indices specific to the process industry, capital costs from the past can be scaled to current conditions by multiplying by the ratio of inflation index values ... 

For typical process plants, use 47,000 U.S. (CE instruments = 1000) per MPI for highly automated batch processes, use 69,000 to 82,000 U.S. (CE instruments = 1000) per MPI. CE instruments is the Chemical Engineering inflation index for process instruments. Details are given in Section c and in Table 16.12. Scale the instrument cost to the correct time. 

Comment In practice, a date or inflation index value and error range should be given with every cost estimate. 

CsheI, = cost (FOB) of pressure vessel (or shell) in 1977 dollars Fm = adjustment factor for the material of construction FP = adjustment factor for the column pressure I = inflation index to correct the cost from mid-1968 to the end of 1977 dollars... 

Fewer than 7% of definechbenefit pensixm plans provide inflation-indexed increases fKehrer, 1995), which are likely to result only if pensioners petition their employers. 

Bonds that have part or all of their cash flows linked to an inflation index form an important segment of several government bond markets. In the United Kingdom, the first index-linked bonds were issued in 1981 and at the end of 2012 they accounted for approximately 25% of outstanding nominal value in the gilt market. Index-linked bonds were also introduced in the United States Treasury market but are more established in Australia, Canada,... 

Index-linked or inflatiOTi-indexed bonds present additional issues in their analysis, due to the nature of their cash flows. Measuring the retimi on index-linked bonds is less straightforward than with conventional bonds, and in certain cases there are peculiar market structures that must be taken into accotmt as well. For example, in the United States market for index-linked treasuries (known as TIPS from Treasury Inflation-Indexed Securities) there is no significant lag between the inflation link and the cash flow payment date. In the United Kingdom, there is an 8-month lag between the inflation adjustment of the cash flow and the cash flow payment date itself, while in New Zealand there is a 3-month lag. The existence of a lag means that inflation protection is not available in the lag period, and that the return in this period is exposed to inflation risk it also must be taken into account when analysing the bond. 

FIG U RE 6.3 Example of index-linked yield analysis, UK 01/8% Treasury 2024 (assumed annual inflation rate 2.57%, base inflation index 242.4, reference RPI value 256.1), showing real yield and money yield, 18 September 2014. ( Bloomberg L.P. Reproduced and used with permission.)... 

Traditionally, information on inflation expectations has been obtained by survey methods or theoretical methods. These have not proved reliable however, and were followed only because of the absence of an inflation-indexed futures market. Certain methods for assessing market inflation expectations are not analytically valid for example, the suggestion that the spread between short- and long-term bond yields cannot be taken to be a measure of inflation expectation, because there are other factors that drive this yield spread, and not just inflation risk premium. 

In earlier chapters, we reviewed the basic features of index-linked bonds and their main uses. We also discussed the techniques used to measure the yield on these bonds. The largest investors in indexed bonds are long-dated institutions such as pension fund managers, who use them to match long-dated liabilities that are also index linked for example, a pension contract that has payments linked to the inflation index. It is common though for investors to hold a mixture of indexed and conventional bonds in their overall portfolio. 

The drawbacks of each of these approaches are apparent. A rather more valid and sound approach is to constmct a term structure of the real interest rates, which would indicate, in exactly the same way that the conventional forward rate curve does for nominal rates, the market s expectatimis rat future inflation rates. In countries where there are liquid markets in both conventional and inflation-indexed bmids, we can observe a nominal and a real yield curve. It then becomes possible to estimate both a conventional and a real term structure using these allows us to create pairs of hypothetical conventional and indexed bonds that have identical maturity dates, for any point on the term structure. We could then apply the break-even approach to any pair of bonds... 

The inflation rate is determined by the inflation index expectations. For instance, at first coupon date, the inflation rate is 2.1% and is given by ... 

Brynjolfsson, J., Fabozzi, F. (Eds.), 1999. Handbook of Inflation-Indexed Bonds. FSF Associates, New Hope, PA. 

Deacon, M., Derry, A., 1998. Inflation-Indexed Securities. Prentice HaU, Ltmdon. 

Fleckenstein, M., 2012. The inflation-indexed bond puzzle. Working Paper, UCLA. 

Roll, R., 1996. US Treasury inflation-indexed bonds the design of a new security. 1. Fixed Income... 

Wrase, J.M., 1997. Inflation-indexed bonds how do they work Federal Reserve Bank of Philadelphia. 

An index-linked bond has its coupon or maturity value or sometimes both linked to a specific index. When governments issue index-linked bonds, the cash flows are linked to a price index such as consumer or commodity prices. Corporations have also issued index-linked bonds that are connected to either an inflation index or a stock market index. For example, Kredit Fuer Wiederaufbau, a special purpose bank in Denmark, issued a floating-rate note in March 2003 whose coupon rate will be linked to the Eurozone CPI (excluding tobacco) beginning in September 2004. Inflation-indexed bonds are detailed in Chapter 8. 

Inflation or purchasing power risk reflects the possibility of the erosion of the purchasing power of bond s cash flows due to inflation. Bonds whose coupon payments are fixed with long maturities are especially vulnerable to this type of risk. Floaters and inflation-indexed bonds have relatively low exposures to inflation risk. 

Callable bonds, putable bonds, mortgage-backed securities, and asset-backed securities are examples of (1). Floating-rate securities and inflation-indexed bonds are examples of (2). Convertible bonds and exchangeable bonds are examples of (3). 

It is true that the very recent history has been of low and relatively stable inflation, and if we look at the relationship between the first 30-year US Treasury Inflation-Indexed bond issued and an appropriate nominal comparator of similar date, the implied US inflation rate has ranged between a low of 1.2% and a high of 2.6%. However, inflation at those bounds would mean that US 100 paid in 30 years time... 

---