In which scenario will an investor benefit from inflation-indexed bonds?

Investors benefit from inflation-indexed bonds primarily when inflation rates rise. These types of bonds are designed to protect investors from the eroding effects of inflation by adjusting the principal and interest payments based on changes in the inflation rate, typically measured by the Consumer Price Index (CPI). When inflation increases, the value of the bond's payments also rises, providing a higher real return to the investor compared to conventional bonds, which do not offer such adjustments.

This mechanism ensures that as the cost of living increases, the investor's income from the bond keeps pace with inflation, maintaining purchasing power. In contrast, falling inflation rates or stable economic conditions may not yield as favorable returns for inflation-indexed bonds since they are specifically designed to guard against rising prices.