To address inflation risk, many governments issue inflation-indexed bonds (also called inflation-linked bonds or TIPS in the U.S.). These bonds adjust the principal and/or interest payments based on changes in an inflation index, such as the Consumer Price Index (CPI). This ensures that investors receive returns that maintain their purchasing power even when inflation fluctuates.

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How is the Inflation Factor Calculated?

Inflation-indexed government bonds require daily adjustment of the inflation factor to reflect inflation changes smoothly over time, even though the underlying inflation data (CPI) is published monthly and with a delay (often 3 months). This means daily inflation factors must be interpolated between monthly CPI values that are lagged by three months.

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Determine the Index Value

  1. Coupon payment date: Date for which we want to calculate factor
  2. Subtract the lag in months from the given date to get lagged date
  3. Since CPI is only monthly, estimate CPI for every day using linear interpolation.
  4. Using the daily interpolated series, find the CPI corresponding to the lagged date.

Inflation factor are relative to a base CPI date, which is interest accrual date for given bond. Retrieving the CPI at the base date (interpolated if necessary) according to procedure above alows to calculate inflation factor for given coupon payment date for given bond:

Inflation Factor=CPI on lagged dateCPI on base date\text{Inflation Factor} = \frac{\text{CPI on lagged date}}{\text{CPI on base date}}

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How is the Inflation Factor applied to inflation linked bond?

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Adjusted coupon

To adjust the coupon with inflation factor, multiply base coupon by inflation factor

Adjusted Coupon=Base Coupon * Inflation Factor\text{Adjusted Coupon} = \text{Base Coupon * Inflation Factor}

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Adjusted principal

To adjust the principal with inflation factor, multiply base principal by inflation factor

Adjusted Principal=Base Principal * Inflation Factor\text{Adjusted Principal} = \text{Base Principal * Inflation Factor}

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What we offer?

Our inflation factors API provides both historical and live data for lagged daily CPI indexes for the following countries

  • USA
  • UK
  • Germany
  • Italy
  • France
  • Spain

To calculate adjusted coupon and/or principal, follow these steps:

  1. Request CPI data for the date of the coupon payment and the interest accrual date from the API.
  2. Calculate the Inflation Factor
Inflation Factor=CPI on lagged dateCPI on base date\text{Inflation Factor} = \frac{\text{CPI on lagged date}}{\text{CPI on base date}}
  1. Multiply base coupon or/and base principal by Inflation Factor
Adjusted Coupon=Base Coupon * Inflation Factor\text{Adjusted Coupon} = \text{Base Coupon * Inflation Factor} Adjusted Principal=Base Principal * Inflation Factor\text{Adjusted Principal} = \text{Base Principal * Inflation Factor}