What are TIPS primarily designed to protect against?

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TIPS, or Treasury Inflation-Protected Securities, are specifically designed to provide protection against inflation. They achieve this by adjusting the principal value of the bond in accordance with changes in the Consumer Price Index (CPI), which measures inflation. This means that as inflation rises, the principal amount of TIPS increases, resulting in higher interest payments over time. When the bond matures, the investor receives the greater of the original principal or the adjusted principal, ensuring that their purchasing power is maintained in real terms.

This mechanism is particularly beneficial for investors looking to preserve the value of their investments against the eroding effects of inflation, making TIPS an effective tool for those concerned about rising prices over the life of the bond.