TIPS are a type of Treasury security that is indexed to inflation as a way to shield investors from the negative effects of inflation. The securities’ par value rises with inflation as measured by the Consumer Price Index while interest rate remains fixed. TIPS also offer investors another layer of diversification as many aggregate bond funds exclude TIPS from their holdings.

“We expect some of the major one-off drops—especially the sharp fall in wireless telephone costs due to changes in major pricing plans—to wash out of the data in coming months and lift the annual rate of core inflation to the Fed’s 2% target, although base effects will keep the data noisy,” said BlackRock. “Wednesday’s October CPI report, showing a 0.2% monthly increase in core prices, reinforces this view.”

Related: 4 ETFs for Inflation Protection on the Cheap

While inflation expectations may remain muted now, investors are already looking into TIPS as a hedge against rising prices ahead. TIPS returns are affected by interest-rate risk as well as changes in the principal value when the Consumer Price Index moves. TIPS will adjust their principal value upward in response to a higher CPI, but the reverse occurs during periods of deflation.

“This CPI release was the last before the Fed’s December meeting at which it is expected to raise interest rates for the fifth time in this cycle to 1.25%–1.5%. We see scope for the Fed to raise rates a few more times in 2018,” according to BlackRock.

For more information on Treasury inflation protected securities, visit our TIPS category.

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