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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 are inflation factors calculated?

Inflation-indexed government bonds require daily adjustment of the inflation factor, but Consumer Prices Index (CPI) are typically 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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How we determine the inflation adjustment factor

  1. Take the coupon payment date, which is the date for which we want to calculate the factor;
  2. Subtract the lag in months from the given date to get lagged date;
  3. Since CPI is only monthly, determine CPI for every day using linear interpolation;
  4. Using the daily interpolated series, determine the CPI corresponding to the lagged date.
Inflation factors are relative to a base CPI date, which is interest accrual date for the given bond. Retrieving the CPI at the base date (interpolated if necessary) according to the procedure above allows us to calculate the inflation factor for the given coupon payment date for the 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 are inflation factors applied to inflation linked bond calculations?

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Adjusted coupon

To adjust the coupon by an inflation factor, multiply the base coupon by the 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 by an inflation factor, multiply the base principal by the 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