Some bonds issued by the US Treasury make payments indexed to inflation, compensating 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 website 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?