World Economics - Insight , Analysis and Data

World Economics - Insight , Analysis and Data

Bond yield comparisons are seriously distorted by using consumer price index deflators.

Brian Sturgess - February 2013

This paper argues that calculations of real government bond yields should use GDP deflators rather than consumer price inflation indexes. The GDP deflator measures general inflation across all domestically produced goods and services and not a basket of consumer goods. Real yields are calculated by this method for the ten largest economies. The highest real (GDP deflated) yield was for France (4.6%). Using the “normal” CPI deflator the French government bonds yields were only 0.4%.

Speed Read
  • Measuring real bond yields using GDP deflators shows a radically different picture from using consumer price inflation indexes, the use of which can seriously distort investment decisions
  • The GDP deflator measures general inflation across all domestically produced goods and services and not a basket of consumer goods
  • The highest real (GDP deflated) yield recorded in the top economies was for France (4.6%). Using the “normal” CPI deflator the French government bonds yields were 0.4%.


Real interest rates are simply the difference between nominal yields and inflation, but the price index used to measure inflation can have a significant distorting impact on investment decisions. The most appropriate price index to use is the GDP deflator, but the most frequently used in practice are consumer price indexes. In March 2012, a report by PricewaterhouseCoopers to the UK’s Financial Services Authority recommended using the GDP deflator instead of the Retail Price Index for projected rates of return on a variety of asset classes.[1] On the basis of lower economic growth projections and the change in deflator the FSA subsequently significantly downgraded its projected real rates of return due to become mandatory in April 2014

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