What happens to the purchasing power of cash flows from a long-term bond during periods of inflation?

When considering the effect of inflation on the purchasing power of cash flows from a long-term bond, it is clear that inflation effectively erodes the value of money over time. As inflation rises, the general price level of goods and services increases, which means that each unit of currency buys fewer goods and services than it did before.

For an investor holding a long-term bond, the cash flows received, usually in the form of fixed interest payments and the principal amount at maturity, do not adjust for inflation. Consequently, as inflation increases, those fixed cash flows will buy less than they would have when the bond was issued. This decrease in purchasing power signifies that the real return on the bond, after accounting for inflation, diminishes over time. Therefore, the correct understanding is that the purchasing power of cash flows from a long-term bond decreases during periods of inflation.