November 04, 2026
Protecting Purchasing Power in an Inflationary Environment
Inflation continues to be a concern for investors, and even when it moderates, its cumulative impact can significantly erode purchasing power over time.
Key Takeaways:
- Inflation protection matters because rising prices can erode purchasing power over time, even when inflation slows.
- TIPS are government-backed bonds designed to help preserve purchasing power while paying a fixed coupon rate.
- Unlike traditional Treasuries, TIPS adjust principal for inflation, affecting interest payments, but still carry interest-rate risk and tax considerations.
- Within a portfolio, TIPS can help hedge against inflation and diversify fixed income holdings without predicting where inflation is headed.
How TIPS Help Preserve Purchasing Power.
Treasury Inflation-Protected Securities (TIPS) are designed to help address that risk. Like traditional U.S. Treasury bonds, TIPS are backed by the federal government, pay a fixed coupon rate, and have a set maturity date.
What Sets TIPS Apart: Adjusting for Inflation.
Traditional Treasury bonds provide a fixed nominal return when held to maturity. TIPS, on the other hand, are designed to provide a real return, one adjusted for inflation.
As inflation rises, the principal value of TIPS increases. Because the fixed coupon rate is applied to that adjusted principal, interest payments increase as well.
The reverse can happen during periods of deflation, such as those following the 2008 financial crisis: Principal values can decline, resulting in lower interest payments. However, investors who hold TIPS to maturity are guaranteed to receive at least the bonds’ par value.
While TIPS adjust for inflation, they are still bonds and remain subject to interest-rate risk. Their market prices fluctuate as interest rates change.
Taxes Are Another Consideration.
Like other Treasuries, interest income from TIPS is subject to federal income taxes but generally exempt from state and local income taxes.
One important difference is that increases in inflation-adjusted principal are also taxable annually if held in a taxable account, even though investors don't receive that additional principal until the bonds mature or are sold. This is called phantom income.
Because of this annual tax treatment, TIPS can be particularly attractive in tax-advantaged accounts.
Where Do TIPS Fit in a Portfolio?
They are a tool within fixed income to help preserve purchasing power, hedge against inflation, and provide overall fixed income diversification. The goal isn't to predict where inflation is headed next, but to build portfolios that can withstand different economic environments.
If you have any questions about TIPS, please reach out to your advisor.
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About the Author
Blerina Hysi
Director, Fixed Income
