A bond that is adjusted with inflation. An inflation-linked bond is designed as a hedging tool for holders (investors) against inflation. This bond is primarily issued by sovereign governments, such as the U.S. and U.K., as means by which inflation indexing can guarantee that the principal and interest payments rise and fall with the rate of inflation.

Examples of inflation-linked bonds include TIPS and I-Bonds, which are designed to protect investment returns from the loss of purchasing power. These securities may also help increase portfolio diversification, accounting for the effect of purchasing power losses at times of inflation. Such inflation-linked bonds (ILBs) may take other forms, depending on pegged time interval, such as daily inflation-linked bonds (daily ILBs) where the securities are adjusted for daily movement in general price levels using a relevant price index.

These bonds are used to eliminate the risk of unexpected inflation or to hedge against long-term inflation risk to which the holders of the bonds are exposed either directly or through the investments held by them. Most of the bonds are issued with the floor mechanism that in the event of deflation will prevent the capital at maturity from dropping below the original investment (principal amount).

Nominal bond prices are affected by the so-called expected future inflation. As expectations project higher inflation rates, yields tend to increase while prices fall, with everything else held constant. Inflation-linked bonds, however, provide protection against unexpected inflation as their interest and principal adjust based on changes in the underlying price index.

In the US, treasury inflation protected securities (TIPS) are pegged to the consumer price index (CPI-U)- a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services as published by the Bureau of Labor Statistics. In Europe, most sovereign ILBs are indexed against the consumer price index (Harmonized Index of Consumer Prices (HICP)) excluding tobacco.

Inflation-linked bonds are also known as linkers.