Just three days ago, the $11 billion auction of 10-year TIPS notes by the US Treasury priced with a yield of 0.89 percent, based on a survey of Federal Reserve Banks released by Bloomberg Financial.The demand for the Treasury Inflation Protected Securities (TIPS) was nearly three times the notes on offer with a 2.97 bid to offer ratio. The vast proportion of the bids were from domestic institutional buyers.At the last auction in March, the 10-year TIP yield was 0.92 percent. Prices have been bid higher on increased demand for the inflation protection.Most experts consider the price for the 10-year too high, and suggest a bar-bell approach of short-term or long-term maturities. There is debate on whether the inflation experienced year to date is likely to continue and whether the protection is worth the price.Next month the US Federal Reserve is poised to cease the second quantitative easing programme, or QE2 as it is called. It was announced in August and over the course of the last nine months it infused nearly $600 billion into the US financial system by buying bonds back from the public markets.This has placed significant cash in the coffers of financial institutions, in order to stimulate the economy by increasing the money available. Whether or not it has leaked through the higher credit break-waters into the general public has yet to be seen. It is safe to say, that it did improve perceptions that the economy would benefit. Perceptions impact actions and hence reality.The recent perception is that inflation has risen as a result of QE2 has been evidenced in production constraints for satisfying global demand for grains, metals, and oil which pushed prices higher.It is yet to be seen, whether this inflationary trend is reality or an illusion. Ray Fair, a renowned Economic Professor at Yale University in Connecticut forecasts a doubling of the GDP Price Index (GDP-PI) by the first quarter next year.Note the GDP-PI is calculated from a different perspective than the Consumer Price Index (CPI). It is based on changes in prices from a top-down or macro-economic standpoint, whereas the CPI is based on a basket of consumer purchases and hence a bottom-up or more micro-economic.Professor Fair reported a GDP-PI rate of 1.9 percent for the first quarter of 2011 (Q1 2011), with a forecasted doubling to 3.8 percent by Q1 2012, then reaching four percent by the end of next year. He has been quoted as saying near term inflation is going higher than the market anticipates. This is a probable scenario, as Fair is well-respected for his forecasting acumen. However probable, it is not a certainty.The uncertainty arises from what will happen when the US Federal Reserve turns-off the tap on the flood of money. The question is whether after the run-off will the economy merely be a soggy mess or whether the flood fertilised the roots of economic growth or result in unruly weeds of hyperinflation. It is impossible to know. None-the-less, it is prudent to protect against the erosive effects of inflation should it continue to spike. There are few different investment strategies to consider, such as TIPS, CPI-adjusted bonds, and floating rate preferred securities.TIPS are issued by the US Treasury and the principal is guaranteed by the full faith and credit of the US government. The coupon interest rate is set at issue as part of the auction mentioned above. This is deemed to be a ‘real rate’, excluding the inflation premium priced into most bond yields. After issue the interest paid and the principal value on the TIPS are adjusted semi-annually based on the CPI-All Urban Consumers. The principal is adjusted by the semi-annual inflation rate. So with an annual rate of two percent, the semi-annual adjustment would be the principal of $100,000 times 1.01. From that the interest payment is calculated. If the interest rate was set at one percent, the semi-annual payment would be $101,000 x one percent divided by two or $505 instead of $500 without adjustment. As inflation rates as measured by the CPI-U climb over time, the affect is cumulative because the next adjustment is based on the new principal, $101,000 x the semi-annual rate. It is important to note that the addition to the principal amount is taxable.Recent demand for TIPS has distorted the value of the inflation protection. The market prices have been bid so high that the adjustment will not factor into adequate protection. Also, the market prices of the TIPS are sensitive to interest rate changes. If interest rates climb before or faster than inflation is reported in the CPI-U, the current price for the bond will decline. The mark-to-market impact of the decline in reported value will negative impact portfolio reported returns if not held to maturity. So, there are downside risks to holding TIPS. Still as an allocation to portfolios dependent upon income makes sense, if it can be bought at the right price.There are other less wide-spread and less liquid inflation-adjusted securities that may float better on an inflation tide. Relatively unknown are CPI-linked corporate bonds. These are adjusted with an inflation factor, wherein the interest paid is either multiplied by 1.5 or so times the reported inflation or where the inflation rate is additive to interest rate, ie a base of two percent plus the inflation rate. Typically, the yield on CPI-linked bonds is higher than comparable TIPS and the adjustment is made monthly instead of every six-months. The principal is not adjusted, so not taxed per sae, but there are still tax implications if held for trading or for sold before maturity. These CPI-linked bonds are illiquid as the market is not as fertile. They are issued by financial institutions such as JP Morgan Chase and Household Finance.Finance companies also issue preferred stock with inflation adjustments. They are known as Floating-Rate or Variable- Rate Preferreds. The adjustment is not inflation based but based on rates in the short-term money markets such as LIBOR or Treasury notes. Those priced on the latter are less responsive to changes in rates. LIBOR based adjustments are more frequent.Typically, the dividend is adjusted quarterly. This makes their market price less volatile than normal preferreds which are long duration and highly sensitive to interest rate changes. Unlike TIPS or CPI-linked bonds, floating rate preferreds are better positioned for when interest rate increase before or faster than reported inflation.Several pooled-investments for the general public that have been created to capitalise on the demand for inflation protected securities. These include Barclays iShares US Treasury Inflation Protected securities fund (symbol TIP US), which is an exchange-traded fund created to track the Barclays Capital US Treasury Inflation Notes Index.It has a reported three-month return of 4.83 percent and 6.46 percent over five years. There is also a Fidelity Inflation-Protected Bond Fund (FINX) with 4.69 percent/5.7 percent three months/five years and a Vanguard Inflation Protected Securities Fund (VIPSX) 4.66 percent/6.17 percent three months/five years. All of them have subsided slightly over the last month.No one is sure which way the current will take inflation and the investments linked to them. At this point in a rather fluctuating economic sea, a little inflation flood insurance could be a good investment.Patrice Horner holds an MBA in Finance, a FINRA Series 7 License, and is a Certified Financial Planner (CFP-US). Any opinions expressed in this article are not specific recommendations, nor endorsements of any products. Individuals should consult with their banker, insurance agent, lawyer, accountant, or a financial planner for advice to address their personal situations.