Editing Interest (section)

===Inflation===
Since the lender is deferring consumption, they will ''wish'', as a bare minimum, to recover enough to pay the increased cost of goods due to [[inflation]]. Because future inflation is unknown, there are three ways this might be achieved:
* Charge X% interest "plus inflation" Many governments issue "real-return" or "inflation indexed" bonds. The principal amount or the interest payments are continually increased by the rate of inflation. See the discussion at [[real interest rate]].
* Decide on the "expected" inflation rate. This still leaves the lender exposed to the risk of "unexpected" inflation.
* Allow the interest rate to be periodically changed. While a "fixed interest rate" remains the same throughout the life of the debt, "variable" or "floating" rates can be reset. There are derivative products that allow for hedging and swaps between the two.

However interest rates are set by the market, and it happens frequently that they are insufficient to compensate for inflation: for example at times of high inflation during, for example, the oil crisis; and during 2011 when real yields on many inflation-linked government stocks are negative.