Yesterday’s consumer price index (CPI) report showed prices rose 3.3% for the year through March 2026. Inflation looks like it’s back.
That reading is a jump from the 2.4% February increase, at least partly reflecting a surge in gasoline and diesel fuel prices from the war with Iran.
In his Wall Street Journal column this weekend, Jason Zweig wrote about TIPS bonds as a way to combat inflation. He reminded investors that the scariest thing investors face may not be a stock market crash, but inflation.
Similarly, Bill Bengen’s retirement studies confirm that the worst time to retire wasn’t in the 1930s, but in the late 1960s. That’s because inflation put more stress on a portfolio trying to support a retiree than a bad stock market did. Bengen’s system for withdrawals in retirement includes annual inflation adjustments, making inflation a significant portfolio stress.
In his column, Zweig touts TIPS (Treasury Inflation Protected Bonds), whose principal moves with CPI. Zweig writes that TIPS are a great way to guard against the loss of purchasing power if you hold them to maturity.
TIPS are bonds issued by the U.S. Treasury in 5-year, 10-year, and 30-year maturities. They trade in weird ways sometimes, and now longer-term TIPS are trading so as to deliver CPI plus 2% or more annually to an investor who can hold the bonds to maturity.
Even shorter-term TIPS are trading so as to deliver more than 1% plus CPI annually. Below is an example of a 10yr TIPS bond issued in 2020 that matures in 2030. It is currently yielding 1.24% plus CPI annually for an investor who can hold it to maturity.
This bond was once priced to deliver less than CPI to an investor (in most of 2021), but now it isn’t. Also, in early 2023, it was priced to deliver around 2.5% plus inflation to an investor.
Zweig gives an example of someone who is, say, a decade from retirement, and has a big enough nest egg that it will be enough for them provided it keeps up with inflation. In that case, TIPS can be a good “bridge” to retirement.
TIPS are usually better held in tax-advantaged accounts such as IRAs. They aren’t right for all investors. Their prices can go down if there is deflation. But they can be part of many portfolios seeking inflation-protection. And investing is at least partly (if not mostly) about maintaining purchasing power.
There are questions about how accurately CPI captures inflation. There are “hedonic adjustments” and other things that make some investors skeptical. (A hedonic adjustment potentially adjusts a higher price of something downward, such as a piece of technology that offers more functionality than it used to.) Also, others worry about the solvency of the U.S. Treasury. A TIPS bond is a loan to the U.S. Government.
Nothing is certain, but a loan to the U.S. Government that comes with inflation-protection looks like a decent deal for the part of many investors’ portfolios dedicated to bonds right now.
Also, nobody knows how long the war will last, or how long the Strait of Hormuz will remain blocked and keep oil prices elevated. But having some inflation protection in your portfolio can provide some solace in the face of these problems.
