Here's a simplified example of the cash flows from an inflation linked bond like TIPS. While the actual mechanisms can be more complex, such as TIPS, paying coupons semi-annually, and incorporating a time lag between official inflation measurement and payment adjustments. This example is designed to illustrate the basic mechanics. Let's say we have a five year principle inflation linked bond that pays a fixed coupon of 2%. This coupon rate remains constant, but it's applied to an inflation adjusted principle, meaning that as inflation affects the principle amount, the actual dollar coupon payments adjust accordingly. At issuance, our CPI reference is set at 100. In the first year, CPI rises to 104. In other words, there was inflation of 4%. For this TIPS bond, the principle adjusts to 104% of the original amount. The first year coupon payment will be 2% of this adjusted principle, which equals 2.08% of the original face value. This continues into year two. Inflation here was 2.88%. Increasing the CPI adjusted principle to 107%. The coupon payment is now 2% of this adjusted amount, or roughly 2.14% of the original principle. During years three and four, deflation causes the adjusted principle to decrease. As a result, the coupon payments also decrease. Even though the principle can adjust downwards due to deflation, due to the deflation flaw at maturity, investors will receive at least the bond's original face value. Finally, in year five with a 0.96% inflation rate, the final adjusted principle reaches 105%. The coupon payment is again, 2% of this resulting in a payment of 2.1% of the original principle. At maturity, the adjusted principle is 105% of the original amount, and the investor receives this 105% of the original principle, effectively capturing the cumulative inflationary effect over the life of the bond.