Several years after the U.S. Treasury initially proposed auctioning a new type of bond indexed to the inflation rate, Vanguard investors now have a fund to do the investing for them. So you might say the Fed is battling inflation and so is Vanguard with its Inflation-Protected Securities fund. Vanguard's Inflation-Protected Securities fund could be good news for investors since Tuesday's CPI report showed signs of rising inflation.
Inflation indexed bonds do their work in a number of ways.
Like any bond, they are sold with a fixed rate of interest. However they differ from other bonds in that they pay interest on a principal amount that moves with the consumer price index. This rate of interest can be thought of as a real rate of return that investors demand after inflation because the bond's principal and yield are adjusted for inflation. The inflation protection built into this fund comes when the bonds are repriced by the Treasury. This repricing occurs every six months and is tied to the CPI, as I mentioned earlier.