Inflation is the rate at which the general level of prices for goods and services rises, eroding purchasing power. Central banks attempt to limit inflation and avoid deflation to keep the economy running smoothly.

Inflation erodes the purchasing power of the fixed interest payments received from fixed income investments. When inflation rises, the real value of these payments decreases, making them less valuable over time.

Fixed income investments, such as bonds, provide returns in the form of fixed interest payments. When inflation increases, these fixed payments lose purchasing power, reducing the real return on investment. Additionally, inflation often leads to higher interest rates, which can decrease the market value of existing bonds with lower coupon rates.

The primary risk is the loss of purchasing power of the interest payments and principal. Additionally, if interest rates rise due to inflation, the value of existing bonds with lower rates will decline, potentially leading to capital losses if sold before maturity.

Investors can mitigate the impact of inflation by diversifying their portfolios with inflation-protected securities, such as Treasury Inflation-Protected Securities (TIPS), or by including assets that tend to perform well during inflationary periods, such as stocks, real estate, or commodities.

Treasury Inflation-Protected Securities (TIPS) are a type of U.S. Treasury bond designed to help investors protect against inflation. The principal value of TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index (CPI). Interest payments are based on the adjusted principal, providing a hedge against inflation.

Yes, besides TIPS, other investments that can help protect against inflation include real estate, commodities, and certain stocks. Real estate often appreciates with inflation, commodities like gold and oil can rise in value, and stocks of companies with pricing power can pass on higher costs to consumers, maintaining their profitability.