How are you preparing for the day when the Federal Reserve stops pumping billions of dollars into the deflated economy and resumes the task it's obsessed with in better times: fighting inflation?

Sooner or later, that day will come. When it does, the Fed's performance will determine the performance of a product our deeply indebted U.S. Treasury offers as protection against inflation: Treasury Inflation-Protected Securities.

TIPS are sold in five-, 10- and 20-year maturities. You can buy them at par -- or face value -- or at a discount or premium to par. While the interest rate remains the same for the life of the bond, the interest it pays doesn't. That's because the bond's principal fluctuates based on inflation. If the government's Consumer Price Index goes up, the TIPS' principal also rises, increasing the interest payout. However, in times of deflation when the CPI falls, the principal goes down and TIPS investors get a lower interest payment.

A 10-year, $1,000 TIPS that matured in January paid $39.51 in interest in January 2000. Based on inflation-based adjustments to the principal over the next eight years, the same TIPS paid interest of $50.84 in January 2008. You'll find this example and other information on TIPS at the U.S. Treasury Web site: www.savingsbonds.gov.

The fluctuating principal feature raises issues investors should be aware of. If you own individual TIPS, you will be taxed on any inflation-induced increase in the principal even though the principal will not be repaid to you until the bond matures. When the TIPS does mature, you will receive either the adjusted principal or the original principal, whichever is greater.

When the economic crisis hit full stride last fall, TIPS took it on the chin because deflation, not inflation, became the threat. For example, Vanguard's Inflation-Protected Securities Fund [ticker: VIPSX] generated annualized losses of 14.5 percent in the second half of 2008.

"They're not the kind of thing you want to own in a deflationary environment," said Matt Yanni of Yanni & Associates Investment Advisors in Franklin Park.

This year, as investors digested the inflationary implications of massive stimulus spending, TIPS rebounded. The Vanguard fund generated annualized returns of 11.4 percent in the first half.

"They're not a spectacular investment like they were a few months ago, but we still like them," said Louis Stanasolovich of Legend Financial Advisors in McCandless.

Currently, the break-even point on a 10-years TIPS is about 1.8 percent. That means if inflation over the next decade runs at a higher clip than 1.8 percent, TIPS will outperform conventional Treasury securities; if it runs less, you'd be better off in conventional Treasuries, Mr. Yanni said. The pricing is based in part on how good of a job investors expect the Fed will do when it comes time to turn off the stimulus spigots and keep inflation in check.

"TIPS are probably a reasonably good bet in case of a central bank policy error," said Donald T. Ellenberger, manager of Federated Investors U.S. Government Securities Fund: 2-5 years [FIGTX].

He believes that TIPS have a couple of things going for them: the break-even point on a 10-year TIPS is more than 1 percentage point below the average annual inflation rate since 1920 (3 percent) and there are a number of inflationary trends at work besides stimulus spending.

Investors can purchase individual TIPS in increments of $100 directly from the Treasury or through a bank, broker or dealer. Or they can buy a portfolio of TIPS by investing in a mutual fund or exchange-traded fund that invests in TIPS. If you purchase TIPS on your own, advisers recommend buying issues that mature over a number of years. That will give you the inflation protection you're seeking.

You can get that protection much more easily by purchasing a mutual fund or an ETF, says Nancy Skeans, managing director of Schneider Downs Wealth Management Advisors.

"Both of them are going to give you the laddered type portfolio," she said.

Unlike those who buy TIPS directly, investors in TIPS mutual funds and ETFs are paid whenever inflation increases a TIPS' principal. In addition to taxes on the distribution, they also must pay management fees the funds charge. Vanguard's TIPS fund sports an expense ratio of 0.2 percent. Other funds charge 0.7 percent or more.

"When you get beyond 0.5 percent, it's getting a little expensive," Mr. Stanasolovich said.

Among the ETF options, the iShares Barclays TIPS Bond Fund [TIP] has a 0.2 percent expense ratio and the SPDR Barclays Capital TIPS ETF [IPE] charges 0.19 percent.

Most advisers also recommend holding TIPS inside tax-advantaged accounts such as IRAs or 401(k)s. There is no hard and fast rule as to what percentage of your bond holdings should be invested in TIPS. Ms. Skeans suggests around 25 percent. Mr. Stanasolovich says depending on their circumstances, some investors may want to hold more.

He also recommends doing your homework before investing.

"You can't read enough about them," Mr. Stanasolovich said.