Swapping from headline to core inflation and commodity hedging

Nicolas Fulli-Lemaire and Ernesto Palidda argue for a risk reduction in ALM strategy by targeting core rather than headline inflation for long-term hedgers, while proposing an overlaying core versus headline swap to hedge the potential asset-liability gap

Whether inflation indexation should be performed based on core rather than headline inflation benchmarks, or on the consumer price index (CPI) rather than the retail price index, has been a concern for central banks and pension funds, academics and practitioners alike.

At least 23 central banks around the world use inflation targeting and to this day, most of them display headline inflation targets to anchor expectations. Some have even switched from core to headline targeting in the last