Inflation Just Re-Accelerated to 3.1%. Buy the Index-Linked Gilt — 1.99% Real Beats a 5.39% Nominal When Prices Keep Rising

The maths that decides this debate is one line: a conventional gilt pays a fixed nominal yield; an index-linked gilt pays RPI plus a real yield. The breakeven is the inflation rate at which the two tie. On 15 September the Bank of England spot curve showed a 10-year nominal yield of 5.39% and a 10-year real yield of 1.99%. The breakeven is therefore 3.40%.

Set that against what the ONS actually printed: RPI is 3.4% right now. The linker pays RPI with a three-month lag, so the inflation you are compensated for is not hypothetical — it is the 3.4% already in the data. To win with the linker, realised RPI over the next decade has to average more than 3.40%. Today's RPI is 3.4%. You are being offered a decade of inflation protection at a breakeven that equals the inflation already in front of you.

And 1.99% real is not a consolation prize. For much of the decade before 2022, UK real yields were negative — investors paid the government to protect their money from inflation. Locking a positive 1.99% real for ten years is one of the best inflation-protected deals UK savers have been offered in years.

CPI bottomed at 2.6% in June, rose to 2.9% in July and 3.1% in August. Goods inflation jumped from 2.2% to 2.7% in a single month. Transport prices rose 4.6% on the year, driven by petrol at 161.3p a litre and diesel at 181.8p — the highest petrol price since November 2022. Oil is above $108 a barrel and the Middle East conflict that began in late February is still feeding into long-haul air fares and shipping.

The Bank of England's own worst-case scenario, published in July, has UK inflation peaking at 4.5% by the middle of 2027 if the conflict escalates. The City expects at least four rate rises to 4.75% next year. A central bank does not signal that path because inflation is about to collapse back to target. The conventional gilt pays you the same 5.39% no matter which way that line moves. The linker pays you more precisely when prices rise — which is the job you asked it to do.

For money held outside an ISA or SIPP, tax is where the conventional gilt quietly loses. The entire 5.39% yield on a conventional gilt is taxable income. A higher-rate taxpayer who has used their £500 Personal Savings Allowance keeps only about 3.2% of it.

The index-linked gilt inverts the structure. The inflation uplift on the principal is a capital gain, and gains on gilts are exempt from capital gains tax under section 115 of TCGA 1992. Only the small real coupon — a fraction of a percent — is income.

Run the numbers on £50,000. A conventional gilt at 5.39% pays £2,695 of interest a year — every pound taxable. A higher-rate saver with the allowance spent hands £1,078 to HMRC and keeps £1,617. An index-linked gilt at 3.4% RPI adds about £1,700 of inflation uplift to the principal in year one, and that uplift is a capital gain: no CGT, no income tax. The taxable part is only the real coupon. The same higher-rate saver keeps nearly all of the linker's return. Same government, same default risk, a materially different amount left in your pocket.

Inside a wrapper the tax point is moot. Outside it, the linker is doing the work of a tax wrapper by itself. That is not a rounding error; it is the difference between keeping your inflation hedge and handing a slice of it to HMRC.

Most UK index-linked gilts track RPI, not CPI, and they do so with a three-month lag. Critics call RPI a flawed legacy measure — it runs structurally above CPI, 3.4% versus 3.1% in August — and the lag means you are paid on a slightly stale print. Both are true. For someone buying inflation protection, both are features. You are paid the higher of the two indices, and the lag smooths month-to-month noise rather than amplifying it. The mechanics are laid out in our Index-Linked Gilts explainer.

The ONS publishes the two series side by side: CPI at 3.1% and RPI at 3.4% in August. The gap is structural — RPI's formula includes housing costs in a way CPI does not — and the linker pays you on the higher number. If prices ever fell outright, the redemption is floored at £100, so you keep your real yield without the downside of negative indexation.

Be honest about the counter-argument. If the Middle East conflict cools and oil falls back, the fuel-driven spike unwinds and headline inflation drifts down toward core, which is a calmer 2.6%. In that world the conventional gilt's 5.39% looks brilliant — a real return near 3.4% — and the linker's 1.99% real looks modest.

But look at what that scenario asks of you. It asks you to pay the same price for certainty and then bet against your own inflation insurance. The 1.99% real yield on the linker is positive and locked for ten years no matter what. You are not sacrificing return to own the hedge; you are choosing a guaranteed real return of about 2% over a nominal return whose real value is unknown. The conventional gilt only wins big in a disinflation you are not being paid enough to predict. Insurance that only costs you when nothing bad happens is insurance worth holding.

You buy linkers the same way as any gilt: through the DMO's purchase service, through a broker, or through a gilt fund. The wrapper decision matters more than the execution. Inside an ISA or SIPP the tax point is moot; outside, the CGT exemption is doing the work. Start at the gilts hub for the full mechanics and check how to buy UK gilts before you commit. The 24 August debate on index-linked gilts versus fixed savings runs the parallel tax maths if you want the savings-account version.

Cost matters. Buying through the DMO is cheapest for a single gilt held to maturity; a broker suits smaller sums and makes selling easier; a gilt fund pools the job but charges an ongoing fee and you lose the clean hold-to-maturity maths. If you are matching a known future expense, buy the individual gilt and stop trading it.