The Fed is targeting an inflation rate of about 2%. Additionally, looking at the Fed’s preferred inflation gauge, the Commerce Department’s consumption expenditure price index, inflation has undershot 2% for over two-and-a-half years.
There are some issues with TIPS investors need to be aware of.
“The inflation adjustment, which perfectly mirrors the CPI, increases the principal that will be returned to investors. Yet the fixed-income component can actually nullify that hedge. That’s because the longer the duration of any bond, the more sensitive it is to increases in interest rates. And rates generally rise with inflation. So the price of a TIPS can fall while its inflation component gains,” according to Barron’s.
iShares TIPS Bond ETF
