Really confused with impact of Inflation-Linked bonds on Discount rates

CFA Level II Portfolio Management
#1

Morgan asks Chan to reflect on what the yield curve implies about investor expectations and the state of the economy. Chan states that the difference between the 10-year UK inflation-linked government bond rate and the 10-year nominal bond rate reflects both investor expectations about the level of future inflation as well as a premium for the uncertainty of future inflation

Is Chan most likely correct in his response to Morgan’s question regarding how changes in the economy influence investors’ inflation expectations?

  1. Yes.
  2. No, with regard to the uncertainty of inflation.
  3. No, with regard to the future level of inflation.

The answer to this question is A, but I don’t understand why. Inflation bonds protect the investor against inflation so wouldn’t the discount rate be a Risk-free rate + Inflation (l+θ)? So if subtract nominal with inflation-linked my break-even inflation would be just uncertainty and not inflation + uncertainty?
Where am I going wrong, is my understanding of inflation-linked bonds wrong? Thanks in advance

#2

What’s inflation in the US going to be from today till 15 June 2024?

#3

I am not from the States but a quick Google search says 2024 predicted inflation is 2.3% but it’s not certain. Anything can happen

#4

Bingo.

Therefore, if you buy TIPS you assume the risk that inflation will be different than what’s predicted, so the price (technically, the required rate of return from which the price is derived) includes a premium for that risk.

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