TIP's do indeed track the inflation rate, but the so called 'gains' are taxed, so your money still loses purchasing power. Munis aren't taxed, but the yields don't even come close to the CPI rate, unless you take on interest rate risk by buying longer duration paper. Is there <b>any</b> way for the cash portion of my portfolio to keep up with inflation (even assuming the CPI is accurate)?
Simply supply and demand. Too much paper supply, too little bonds to meet demand. The result? Lower yields. Buying overpriced bonds and receiving a -3% real return on your money is better than doing nothing and getting -8% return on your M3 near-money.