Inflation can eat away at your investments.
But there's an entire class of inflation-hedge bonds that protect investors from inflation risk. The most popular of these are the extremely safe fixed-income investments from the U.S. Treasury Department known as TIPS, or Treasury Inflation-Protected Securities, introduced in 1997.
When you buy a TIPS, you don't have to worry that the value of the face value of the security will decline in an inflationary economy. The principal in a TIPS security is adjusted semiannually to reflect rises in the Consumer Price Index.
More importantly, the reverse is not true. If the economy were to become deflationary, the principal of the TIPS is not reduced. The government guarantees that the at least the face value of a TIPS will be paid upon maturity.
Where to Buy TIPS
TIPS are sold directly by the Treasury Department in the month in which they are issued. Those sales are free of fees and commissions. Every penny you spend on a TIPS will be invested in the TIPS.
To buy directly from the federal government, you'll need to sign up for the TreasuryDirect program.
After that first month, TIPS are available on the secondary market through brokers, banks and other financial institutions and advisers. Fees and commissions vary among providers. So shop around before you buy.
Other Inflation-fighting Debt Instruments
The bond world offers a number of hedges against inflation. The cost and risks vary.
I Bonds are a form of U.S. Savings Bond. They're backed by the full faith and credit of the U.S. Government and are seen as extremely safe investments.
Also worth considering are inflation-linked corporate bonds, also known as inflation-indexed bonds.