Economics Consumer Price Index Cpi Questions
The impact of the Consumer Price Index (CPI) on inflation-indexed bonds is significant. Inflation-indexed bonds, also known as Treasury Inflation-Protected Securities (TIPS), are designed to protect investors from the effects of inflation. The principal value of these bonds is adjusted based on changes in the CPI.
When the CPI increases, indicating a rise in inflation, the principal value of inflation-indexed bonds also increases. This ensures that the bondholder's investment keeps pace with inflation, providing a real rate of return. Conversely, if the CPI decreases, the principal value of the bonds will be adjusted downward.
Therefore, the CPI directly affects the returns and purchasing power of investors holding inflation-indexed bonds. These bonds provide a hedge against inflation, making them an attractive investment option for individuals seeking to protect their investments from the erosion of purchasing power caused by inflation.