Inflation-Indexed Security

Written By
Paul Tracy
Updated July 4, 2021

What is an Inflation-Indexed Security?

Inflation-indexed securities are a form of savings that protects the principal and interest from the erosion of inflation.

How Does an Inflation-Indexed Security Work?

One of the most significant economic threats to anyone living on a fixed income or a fixed stock of assets is the eroding effects of inflation.  For example, with an inflation rate of 3% per year, a fixed income investment earning 5% per year will yield only 2% earnings in real terms.  Retirees receiving Social Security payments are exposed to inflation on their savings or pensions, even when those payments are adjusted for inflation.

The federal government offers several types of inflation-indexed investments:  10-year notes and 30-year bonds and savings bonds, also known as I-Bonds.  The 10-year notes and 30-year bonds are non-marketable securities that cannot be traded or sold in the secondary market.  I-Bonds offer tax-exempt interest earnings and also cannot be sold.  The principal for both of these inflation-indexed bonds is adjusted with the Consumer Price Index (CPI-U) annually and is payable upon redemption. 

The Treasury Inflation-Protected Securities (TIPS) offer 10 and 20 year bonds that provide CPI adjustments to the principal and interest payments at a fixed rate on the adjusted principal, payable semi-annually.  TIPS bonds are marketable securities and can be bought and sold in the secondary market.

Why Does an Inflation-Indexed Security Matter?

Inflation-indexed securities are an important investment alternative for anyone living on fixed incomes or pensions.  However, except for TIPS bonds, the market for these securities is comprised mainly of "buy and hold" investors.  As a result, the market is fairly illiquid, because there is a lack of buyers and sellers for these securities.  In practice, these bonds do not offer premium returns because they do not have many buyers and they do not have to provide an interest premium to compensate for inflation.

Activate your free account to unlock our most valuable savings and money-making tips
  • 100% FREE
  • Exclusive money-making tips before we post them to the live site
  • Weekly insights and analysis from our financial experts
  • Free Report - 25 Ways to Save Hundreds on Your Monthly Expenses
  • Free Report - Eliminate Credit Card Debt with these 10 Simple Tricks
Ask an Expert
All of our content is verified for accuracy by Paul Tracy and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about Inflation-Indexed Security.
Be the first to ask a question

If you have a question about Inflation-Indexed Security, then please ask Paul.

Ask a question

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

If you have a question about Inflation-Indexed Security, then please ask Paul.

Ask a question Read more from Paul
Paul Tracy - profile
Ask an Expert about Inflation-Indexed Security

By submitting this form you agree with our Privacy Policy

Don't Know a Financial Term?
Search our library of 4,000+ terms