What financial instrument is indicated as a protective strategy against inflation?

Treasury Inflation-Protected Securities (TIPS) are specifically designed as a protective strategy against inflation. Unlike traditional bonds, TIPS have an interest rate that is fixed, but their principal value adjusts based on changes in the Consumer Price Index (CPI), which measures inflation. As inflation rises, the principal amount of TIPS increases, resulting in higher interest payments, thereby preserving purchasing power.

This feature makes TIPS unique and particularly effective in safeguarding against inflationary pressures, since the returns on these securities increase as prices rise. Investors seeking a reliable hedge against inflation often turn to TIPS, as they are backed by the U.S. government and provide a guaranteed return that grows with inflation. In contrast, other options like common stocks, bonds, and real estate may not offer the same level of protection against inflation-related erosion of capital, making TIPS the most appropriate choice for this strategy.