The interest rate, real and nominal, on long-term safe assets is perhaps the most important price in a capitalist economy. It tells one about confidence in governments and the economy. In recent years, these prices have normalised. The era of ultra-low interest rates that began in 2007-09, with the financial crises, seems to be over. An era of normality seemed to be returning. Hurrah! But the world does not really look very “normal”. Should we be waiting for big new shocks, instead?

The UK government has been issuing index-linked gilts since the 1980s. The history of their yields gives us three big stories of the evolution of real interest rates over four decades. The first is one of a huge secular decline. In the 1980s, redemption yields on 10-year index-linked gilts were around 4 per cent. During the pandemic and its immediate aftermath, rates fell to minus 3 per cent. The total swing then was of 7 percentage points. The second story is of how the post-financial crisis economic slump led to an extraordinarily long period of sub-zero real interest rates. The third is of a rapid rise in these yields to around 1.5 per cent, from early 2022. The lengthy period of falling real interest rates that culminated in those negative real rates now seems to be over. We are in a new and far less strange world.

Data on yields on 10-year US Treasury inflation-protected securities (Tips) give a similar picture, but this data has only been available since the early 2000s. From 2013, the two series have diverged, with generally higher yields on the US version. The difference may partly be due to pension regulation in the UK, which in effect imposed a brutal financial repression on defined benefit pension plans. Real interest rates on Tips also rose sharply from the trough reached during the pandemic, but not by as much as on index-linked gilts. As a result, these rates converged. Thus, yields on Tips have recently been about 2 per cent and those on index-linked gilts close to 1.5 per cent.