How Inflation-Protected Bonds May Calm Inflation Fears

Persistent inflation can erode purchasing power, making TIPS a useful long-term hedge despite their exposure to interest-rate risk.

• U.S. inflation averaged 2.5% annually from 2001 to 2025, meaning that $187 in December 2025 was needed to buy what $100 bought in January 2001.
• The authors expect inflation to remain above the Federal Reserve’s 2% target for some time, citing federal spending and deficits, high housing and rental costs, trade and tariff uncertainty, and corporate onshoring.
• TIPS adjust their principal value with inflation, increasing interest payments as the adjusted principal rises; deflation would have the opposite effect.
• In the article’s hypothetical five-year example, a $1,000 TIPS and a $1,000 nominal Treasury both carry a 3% coupon, but the TIPS pays more than twice the nominal Treasury’s interest over five years because of inflation adjustments.
• From January 31, 1999, to July 31, 2026, the Bloomberg U.S. TIPS Index is presented as having outperformed headline CPI, commodities represented by the S&P GSCI Index, and core bonds represented by the Bloomberg U.S. Aggregate Bond Index, with less volatility than commodities.

Takeaway: TIPS may help preserve purchasing power and outperform nominal Treasuries when rates rise with inflation, but they can lose value when real rates rise or when rates increase without higher inflation.