The certificates pay tax-free interest of RPI inflation plus 0.5 per cent for the next five years. Now, the Bank of England forecasts that CPI inflation will be just under 3.1 per cent in the next 12 months and 2.1 per cent thereafter. If we assume RPI inflation is 0.6 per cent more than this - as it has been over the last 20 years - this implies that these certificates will pay an average nominal rate over the next five years of 3.4 per cent a year.
But some people can already do better than this. Some building societies are offering five-year fixed rate savings rates around five per cent. For a basic rate tax-payer, this is more than you're likely to get, on average, from index-linked National Savings.
And if interest rates rise - as the markets and Bank of England chief economist Spencer Dale expect - even ISAs might pay better eventually. The best ISA rates are already three per cent. Even if these rise only a little, they'll pay better than index-linked savings will if RPI inflation falls back to the 2.6 per cent the Bank of England forecasts.
Which raises the question: who then should buy these certificates?
There's one common reply to this that really irritates me. It's that the Bank of England's forecasts will be wrong, as they have been in the past, and inflation will be higher than this.
This is annoying on two grounds. First, the outlook for inflation is inherently uncertain. Anyone who claims otherwise is a fool on the same level as Harold Camping.
Secondly, investing should not be based upon idle futurology - especially when that futurology looks a lot like those legendary generals who were always preparing for the last war. Instead, investors should ask: what products are right for me, and what risks should I insure against, or not?
Viewed from this perspective, there are three classes of investors for whom index-linked savings are appropriate.
One group is those who intend to cash them in after just over 12 months. If RPI inflation is 3.7 per cent over the next 12 months, the certificates will pay a tax-free nominal rate of 4.2 per cent - better than available elsewhere.
A second group is higher-rate taxpayers. If you pay 40 per cent tax, even the best five-year fixed rate savings bond is a worse deal than index-linked savings - unless inflation turns out to be lower than the Bank of England, and most private sector economists, expect. One of the iron rules of investing - an even higher priority than "don't bet heavily on forecasts" - is: use whatever tax breaks you can.
The third class is those savers who would be hard hit if inflation were to exceed expectations.
You might object that this is all of us, as we all have to pay higher petrol and food prices.
You'd be wrong. Inflation, in the proper sense of the word, is a general rise in prices. This means higher wages and profits too. So, if you're in work or own a small business, higher prices should be matched by higher wages and profits. Your job or business thus offers you inflation protection. Insofar as this is not the case, your problem is that you're in a declining industry or, that you have cashflow problems, or that you lack bargaining power. Whatever it is, it is not a problem of inflation. Yes, the average worker is now suffering a fall in his real wage. But this is because he lacks the power to get a decent pay rise - not because of inflation.
However, there are some investors who aren't protected from inflation by their job or business. These, of course, are retired people on level rate annuities. Such annuities protect us against expected inflation - that's why they pay more than inflation-proofed ones in their early years - but they do not protect us against unexpected inflation.
Which is where index-linked savings are so valuable. They offer flat-rate annuity holders insurance against inflation risk - the danger that inflation will be higher than expected.
Herein, though, lies a problem. Anything is expensive when everyone wants to buy it. Those people who are piling into the certificates because of a belief that inflation will stay high are, therefore, helping to depress the market - in the sense of producing low returns if inflation turns out as expected - for those investors who genuinely want protection against inflation risk. If I had a flat-rate annuity, I'd be a little unhappy with the inflation-mongers, even if they do turn out to be right.
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