TIPS and the Dollar

Often with TIPS I see people talk about tracking inflation and keep the purchasing strength of their money but they are ignoring the strength of the dollar. It is very strong (historically?) so a 10 yr TIPS may track inflation but if the dollar reverts to a lower level, you’d still end up losing value of that original money.

What is the alternative to protecting the purchasing value of your USDs, without risk of the loss of principal, aside from TIPS and I-Bonds?

I don’t have one but I don’t think TIPs is actually protecting the purchasing value of the items that you actually buy since their price is also dependent on the strength of the currency. I think people are making a mistake thinking “I’ll buy $10,000 of TIPS to guarantee I can still buy the same items X years down the road”. If the dollar drops 10-15% then those items are likely to cost 10-15% more unless there are 100% built/manufactured in the USA and use parts that are not imported.

Just pointing out a flaw (I think) in that thinking. There isn’t anything risk free that will guarantee your purchasing value IMO.

The CPI-U (which determines the rate paid on I-Bonds and TIPS) is based on actual market prices, regardless of where items are manufactured.

Over the past 20 years, globalization (manufacturing in low-cost countries) has kept inflation low in the U.S. regardless of swings in the value of the USD. De-globalization (returning manufacturing to the U.S. for security and supply-chain reasons) will lead to higher prices due to higher wages and regulatory burdens, regardless of the value of the USD.

1 Like