The acronym “TIPS” stands for “Treasury Inflation Protected Securities.” These are U.S. government bonds that promise to pay interest and principal, like other bonds, but with a catch. Those future interest and principal payments are adjusted for inflation, theoretically protecting the investor from the risk of getting paid back in cheaper dollars.
One thing you can do with TIPS is compare the yield with the yield on a straight bond of the same maturity, and get a read on market expectations for inflation. Investors pay higher prices for bonds that adjust coupon and principal payments for inflation, so these bonds normally have lower (nominal) yields. The spread between the yield on straight bonds and the yield on TIPS can provide a read on market concerns about inflation. Currently, these concerns are very low.
But as I said, those TIPS come with a catch. Granted, they adjust coupon and principal for inflation. But they don’t adjust coupon and principal for inflation itself – they use a proxy. They use government statistics and estimates for inflation, e.g. the Consumer Price Index.
So investors, technically, are not getting protection from inflation, they are getting protection from a Consumer Price Index increase. This may or may not accurately reflect real inflation.
A longer story. Accounting for the price level is a form of government accounting, given that money is produced in the US under a provision providing that Congress shall have the power to coin money, and “regulate the value thereof.”
Accounting for inflation is an art, not a science. There are some very interesting issues leading to potential bias in government inflation statistics.
A topic for another day.