DEFINITION of 'Inflation Protected'
The types of investments that provide protection against inflation or the rise in prices of goods and services. Most hard assets are typically protected against inflation. This is because commodities tend to appreciate during times of high inflation.
BREAKING DOWN 'Inflation Protected'
Certain funds are also created to protect investors from the negative effects of inflation. These funds focus on investing in securities that bring a real return, which is the return on an investment, minus the reduction in its value as a result of inflation. These funds also invest in bonds backed by the federal government. The funds' principal is adjusted quarterly based on the current inflation rate.
The Treasury Inflation Protected Securities (TIPS) is an example of this. The principal portion of this security increases with inflation and decreases with deflation in accordance with the Consumer Price Index (CPI). At maturity, the adjusted or original principal is paid; whichever amount is higher.