Here is an extract from an e-mail discussion I had with MarketWatch's Mark Hulbert, following his post on the subject:
(...) without any adjustment the 5-year TIPS currently embodies a zero inflation rate, and the 10-year carries very small 15 bps implied inflation rate (http://www.bloomberg.com/Well to be precise there are still many risks involved in investing in TIPS even at these prices: there could be more forced sales driving the yields up/prices down, an expanding liquidity risk, or rising real interest rates. But my point is that the risk/reward is extremely favorable.
But I don't think that in current market circumstances we should view this as what the bond market expects inflation to be in the future. It is more likely that the same technical factors that have forced down the value of nearly every financial asset in the past few months have been at play here.
Actually when you think of the fact that the Treasury will not take back money from the holder of TIPS if the CPI turns out to be negative, then TIPS are selling at a pretty amazing value here. The risk/reward is simply not symmetric: if the CPI is zero or above you'll make as well or better than in conventional notes, and if the CPI is negative... you won't make less.