BTp Italia Sì: how it affects the calculation of inflation

Real-time inflation does not exist, and this complicates the indexation mechanism for inflation-linked securities such as the BTp Italia Sì and the old BTp Italia. To obtain a constantly updated inflation coefficient, a complex calculation is required that looks back a few months and then projects the figure forward. This situation could prove advantageous this time round for subscribers to the new BTp Italia Sì issued in June, as starting the calculation retrospectively means being better able to capture the surge in inflation triggered by the war in Iran.

Inflation, as it is generally understood, is the year-on-year percentage change between two values of the Foi index (to which the security is linked; this is the Consumer Price Index for blue-collar and white-collar households, i.e. a basket representing an average of the prices of around 1,800 products (from bread to smartphones, from petrol to utility bills). This index is calculated by Istat every month, and the figure is generally published in the middle of the month following the one to which the calculation refers. The BTp Italia Sì, and its predecessor, use the index values to calculate index-linking over a six-month period; however, this creates a time lag between the bond’s actual maturity and the period of inflation actually covered.

“The BTp Italia Sì,” explains Mario Allegra, Head of Investments at Alfa Planners Scf, “requires the inflation coefficient to be calculated on a daily basis, because the security is traded daily; consequently, it can be traded on the MOT every day. The coefficient for the index-linked bond is calculated by creating a series of index values that rise linearly over the month at the same rate as inflation rose over two consecutive months in the recent past.”

Which ones in particular? The index value is published at least 15 days after the end of the month. If the payment of the variable coupon – in the case of the last product – were to take place within the first 15 days of the month, the data required for the calculation would not be available. Example: let us suppose that on 10 July – yesterday – it was necessary to calculate the revaluation of the BTp Italia Sì. The most recent reference index value available is that for May, because the June value has not yet been published.

“That figure for May,” adds Allegra, “must be compared with the previous figure – which will be the April figure – to work out by how much the index has risen. So, to calculate the July coefficient, I will take the increase between April and May and perform a linear interpolation; in other words, assuming a 1 per cent increase over one month, the calculation of the July coefficient will spread this 1 per cent over the 31 days of the month. Applying this formula to the newly issued BTp Italia Sì, the starting level of the index (102.23333) was calculated using the index values for March and April, whilst the June index level published during the placement was 102.8. ‘There is therefore a lower starting point due to this time lag.’