Lock the 5.39% Nominal Gilt Now. The Index-Linked Breakeven at 3.4% Already Prices a Decade of Inflation

Start with what you actually get. The conventional gilt's yield is fixed the day you buy it: around 5% a year for a decade. August's 10-year average was 4.99%, and the sell-off through early September pushed the Bank of England fitted 10-year spot to 5.39% on the 15th. That is the highest in decades, and it is not a forecast — it is a contractual stream of payments from the UK government.

A nominal return of 5.39% is knowable, bankable and uncomplicated. You know exactly what £ you receive each year and exactly what you get back at maturity. The linker cannot tell you any of that in nominal pounds — its payout depends on a price index that has not happened yet. For capital preservation, certainty is the feature, not the absence of it.

The linker's pitch is inflation protection. The price of that protection is the breakeven. On 15 September the numbers were: 10-year nominal 5.39%, 10-year real 1.99%, so the breakeven is 3.40%.

That 3.40% is the hurdle. RPI must average more than 3.40% over ten years for the linker to outperform. Not in any single month — on average, every year, for a decade. Today's RPI is 3.4%, so the linker is priced as if today's inflation never falls, never even wobbles. If inflation merely reverts to the Bank of England's 2% target, the nominal gilt returns 5.39% while the linker returns roughly 1.99% real plus 2% inflation — about 4%. The conventional wins by more than a percentage point a year. You are being asked to pay a full decade of inflation-at-today's-rate just to break even.

Put the gap in pounds. If RPI averages 2.5% over the decade — still above the Bank of England's 2% target — the linker compounds at roughly 4.5% a year against the nominal gilt's 5.39%. That is a shortfall of nearly a percentage point every single year, compounding for ten years. The conventional gilt does not need inflation to collapse to win. It needs inflation to do anything except stay at today's elevated level for ten straight years.

Strip the August print apart and the re-acceleration is not broad-based. Core CPI — excluding energy, food, alcohol and tobacco — was 2.6% in August, unchanged from July. Services inflation, which the Bank of England watches most closely, was 3.4%, also unchanged. The entire rise came from transport, specifically motor fuels, up 23.0% on the year as the Middle East conflict pushed oil above $108 a barrel.

Petrol at 161.3p a litre and diesel at 181.8p are a war premium, not a wages spiral. The ONS release shows the largest contribution to the rise came from a single division, with no large offsetting effects anywhere else. A supply shock of that kind reverts. When it does, headline CPI follows core back down — and the nominal gilt's real return improves as it falls. The linker is priced for the opposite: inflation that stays at 3.4% forever. The oil shock is exactly the kind of one-off you should not buy a decade-long hedge against.

The linker's linkage is to RPI, and RPI is a measure the ONS itself does not accredit as official statistics. It runs structurally above CPI — 3.4% versus 3.1% in August — but its formula is scheduled for change: from 2030 at the earliest, CPIH methods and data sources will be introduced into RPI, narrowing the gap. Buy a 10-year index-linked gilt today and part of your "inflation protection" is a bet that a legacy index keeps its historical quirk for the life of the bond.

That is a strange bet for a risk-averse saver to make. The conventional gilt owes you nothing but pounds, on dates, in amounts you already know. The linker owes you a formula tied to an index the statisticians are actively reforming. For capital preservation, the simpler contract is the safer one. The full mechanics are in our index-linked gilts explainer.

Index-linked gilts are long-duration assets, and their prices are sensitive to real yields. Real yields drifted higher through the summer — the 10-year real rate has climbed toward 2% — which means the linker's price has been falling even as inflation rises. A further gilt sell-off, the kind the market is now contemplating if the Bank of England is forced to hike from 3.75%, would hurt both assets. The difference is the cushion: the conventional gilt pays 5.39% of income every year to soften the paper loss, while the linker's income is a sliver of a percent and its total return leans far more on price.

If you want a hedge, buy an asset that hedges. The linker protects against inflation but exposes you fully to real-yield moves. The conventional gilt gives you a large, certain income stream and a guaranteed maturity value in the currency you actually spend. There is no version of "safe" that is also a leveraged bet on real rates.

The cleaner way to choose is to ask what you are actually funding. A fixed-rate mortgage, a known tax bill, a future house deposit in pounds — these are nominal liabilities, and a nominal gilt matches them exactly. An index-linked gilt introduces basis risk: your costs rise with CPI or your own spending basket, while the linker pays RPI. The two are not the same, and the gap is a risk you take on for no guaranteed reward.

For most UK savers, the liability is nominal. Locking 5.39% against it is the closest thing to a risk-free answer in a market where almost everything else is a guess. And the conventional gilt has its own tax trick: buy one trading below par and part of your return arrives as a capital gain at maturity, exempt from CGT. The gilts hub and our guide to buying UK gilts cover execution; the 24 August debate runs the same maths against fixed-rate savings if you want the cash comparison.