Inflation-indexed bonds Some bonds issued by the U.S. Treasury make payments indexed to inflation. These inflation-indexed bonds compensate investors for inflation. Therefore, the current interest rates on these bonds are real interest rates-interest rates in terms of goods. These interest rates can be used, together with nominal interest rates, to provide a measure of expected inflation. Let's see how.

Go to the Web site of the Federal Reserve Board and get the most recent statistical release listing interest rates (www.federalreserve. gov/releases/h15/Current). Find the current nominal interest rate on Treasury securities with a five-year maturity. Now find the current interest rate on "inflation-indexed" Treasury securities with a five-year maturity. What do you think participants in financial markets think the average inflation rate will be over the next five years?