What are the mechanics of TIPS and how is the income affected by inflation (CPI-U)?
U.S. TIPS are issued by the U.S. Treasury Department and pay a fixed coupon on a principal value that adjusts for inflation as measured by the CPI-U. Historically, inflation has exhibited a certain seasonality, which may be attributed to varying economic and business cycles. Inflation has generally trended up at the beginning of the year, down in the summer, up slightly in the fall and down dramatically in November and December. One of the mechanics of U.S. TIPS is the principal value’s adjustment for inflation, which occurs after a brief lag from the Bureau of Labor Statistics’ announcement date. In other words, the CPI-U announced in December (which actually refers to November’s inflation) impacts the accretion on U.S. TIPS for January. The CPI-U announced in January (in reference to December’s inflation) impacts the accretion for U.S. TIPS in February. Accretion is essentially the adjustment of principal value due to changes in the CPI-U. Since the income from U.S. TIPS is based on
