Effect of Inflation on Bond Prices

The effect of inflation on bond prices is very simple: when inflation goes up, interest rates rise. And when interest rates rise, bond prices fall. Therefore, when inflation goes up, bond prices fall.

The ways in which economic events, inflation, interest rates, and bond prices interact are basic to an understanding of finance – these relationships are sure to be tested in finance interviews. In general, a positive economic event (such as a decrease in unemployment, greater consumer confidence, higher personal income, etc.) drives up inflation over the long term (because there are more people working, there is more money to be spent), which drives up interest rates, which causes a decrease in bond prices.

The following table summarizes this relationship with a variety of economic events.


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