On Aspects of Inflation in the Context of Commodity and Futures Market

In order to tackle the non-availability of inflation futures data, we introduce the futures on the CPI proxy (FCP). Compared to over-the-counter inflation-linked derivatives, the FCP is a more accessible tool for inflation forecasting. The time series of the FCP chain is analysed by a two-factor valuation model. Our model captures the downward trend of U.S. CPI inflation in 2014. Furthermore, the model-filtered spot CPI alleviates the publication lag of U.S. CPI. The uncertainty of FCP price level prediction is estimated by analysing the fan charts derived from a synthetic option implied volatility surface. Among all fan charts, the one derived from the out-of-the-money option chain yields the most certain price level forecast, although the uncertainty of the corresponding inflation forecast is higher than that of the Bank of England inflation forecast. Additionally, the negative inflation risk premium estimated from the time series of the FCP chain is consistent with post-Lehman estimates in the literature