How are bond prices affected by inflation?

How are bond prices affected by inflation?

Bond prices are inversely affected by inflation. When inflation increases, the purchasing power of the currency decreases, leading to a decrease in the value of future cash flows generated by bonds. As a result, investors demand higher yields to compensate for the eroding value of their investment. This increase in yields causes bond prices to decrease. Conversely, when inflation decreases, the purchasing power of the currency increases, leading to an increase in the value of future cash flows generated by bonds. This results in a decrease in yields, causing bond prices to increase. Therefore, inflation has a significant impact on bond prices, with higher inflation leading to lower bond prices and lower inflation leading to higher bond prices.