An unpredictable market, rising fuel prices, and growing concern that inflation may trend higher as the economic recovery takes hold.

These are three good reasons to add inflation protection to your portfolio, says Mario DeRose, fixed income strategist with Edward Jones in New York.

“There’s always a place in a portfolio to hedge against inflation, even in periods when inflation seems unlikely in the near term,” says DeRose, noting that shocks in the market can cause consumer prices to spike without warning. “You have to be on guard.”

Enter: Treasury Inflation-Protected Securities, or TIPS.

TIPS are government bonds issued by the U.S. Treasury in maturities that range from five to 30 years.

Unlike conventional bonds, TIPS pay out a guaranteed “real” return; the principal is adjusted for inflation based on the Consumer Price Index, CPI, and semi-annual interest payments (the yield) are modified accordingly.

At maturity, investors receive either the inflation-adjusted principal or par value, face value, of the bond, whichever is greater.

As such, TIPS are used to hedge inflation, helping investors maintain purchasing power when the price of goods and services climbs, with the added benefit of providing downside protection during periods of deflation.

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