An inflation swap is an over-the-counter derivative in which one party pays a fixed inflation rate and the other pays the realised change in a price index such as CPI, RPI or HICP. Markets trade two main structures: the zero-coupon inflation swap, which settles once at maturity, and the year-on-year inflation swap, which pays periodic coupons. Users include pension funds, insurers and other investors that hedge inflation risk or take views on inflation. In major currencies, many inflation swaps are available for central clearing.

An inflation swap exchanges two legs on a notional amount. The fixed leg pays a pre-agreed annualised rate. The floating leg pays realised inflation measured from a published price index.

For a zero-coupon inflation swap (ZCIS), the floating leg is based on an index ratio ${\displaystyle I_{T}/I_{0}-1}$, where ${\displaystyle I_{0}}$ and ${\displaystyle I_{T}}$ are the reference index levels at the start and end of the swap after applying market conventions. The contract settles once at maturity. For a year-on-year (YoY) inflation swap, each coupon period pays the realised 12-month inflation rate for that period.

Indexation lag reflects the delay between the observation month and publication. Markets also use interpolation to obtain daily reference levels between monthly index prints. Conventions vary by currency. For example, UK RPI swaps often use a two-month lag with no interpolation, while USD and EUR swaps often use a three-month lag with linear interpolation.

Two common structures are traded.

Additional sources summarise practice across currencies and tenors.

At trade date the par swap rate sets the present value of the fixed leg equal to the present value of the inflation leg. For a zero-coupon inflation swap (ZCIS) with maturity ${\displaystyle T}$ and notional ${\displaystyle N}$ under OIS discounting:

${\displaystyle N\,D(0,T)\,{\big (}(1+K)^{T}-1{\big )}=N\,D(0,T)\,\left(\mathbb {E} ^{\mathbb {Q} }\!\left[{\frac {I_{T}}{I_{0}}}\right]-1\right)}$