TIPS: One way to protect your portfolio from inflation is with TIPS - Treasury Inflated Protected Securities. These pay a fixed rate of interest. However, twice a year the government re-adjusts the principal in response to changes in the Consumer Price Index, as published monthly by the Bureau of Labor Statistics. This means that, as inflation increases, the value of the bond increases. Although the interest rate doesn't increase, holders get a larger cash payment because the percent is applied to a larger principal.
TIPS do well during inflation, but do worse during times of non-inflation or stability. However, over the long haul, they do not do as well as a well-diversified portfolio that includes stocks.
Series I Bonds: The I Bonds offer a guaranteed fixed rate of return, currently at 1%, and a variable rate that is indexed to the CPI, and is reset in November and May. As of December 2005, these bonds were returning a 6.73 percent rate of return - higher than the 10 year Treasury note at that time. However, they are very volatile, as their variable rate can plummet when inflation does.
Learn more at the U.S. Treasury web site
