What's the best measure of inflation for investments?
Discussion
Basically if considering pension/longer term investments what's the best measure of inflation to use, RPI, CPI, CPIH etc?
This is more for long term planning, adjusting the original goal with time, for example if aiming for a "pot" of £500k in 10 years time means realistically in ten years time you'd aim for the 500k plus the compound inflation effect.
Any views most welcome on the most appropriate measures.
This is more for long term planning, adjusting the original goal with time, for example if aiming for a "pot" of £500k in 10 years time means realistically in ten years time you'd aim for the 500k plus the compound inflation effect.
Any views most welcome on the most appropriate measures.
I'd just ignore inflation completely.
The only figure that matters is your assumption of "real" growth - i.e. the difference between projected investment return and inflation - so you deal with it that way. Also keeping all the figures in "today's money" makes it much easier to understand the actual real-world value of your pot at the end. Otherwise you might impress yourself with the size of the projected pot only to find it'll barely buy a ham sandwich when you get there.
Broadly speaking, RPI is being phased out. I suspect most people using an inflation figure these days will use CPI. If you want to get fancy about maintaining living standards in relation to the broader context it's worth remembering that wage inflation is normally ahead of price inflation - hence rising standards of living.
The only figure that matters is your assumption of "real" growth - i.e. the difference between projected investment return and inflation - so you deal with it that way. Also keeping all the figures in "today's money" makes it much easier to understand the actual real-world value of your pot at the end. Otherwise you might impress yourself with the size of the projected pot only to find it'll barely buy a ham sandwich when you get there.
Broadly speaking, RPI is being phased out. I suspect most people using an inflation figure these days will use CPI. If you want to get fancy about maintaining living standards in relation to the broader context it's worth remembering that wage inflation is normally ahead of price inflation - hence rising standards of living.
It's a guess really, like the annual return you plan for. RPI seems to be denigrated (although there may be politiacal reasons for that) & CPI is now preferred. For the last 20 years RPI has averaged 2.7%, CPI 2.0% & CPIH 1.98% so that's a good starting point.
1% feels too low & go much higher than 4% & you'll kill your forecasts without real proof it's valid. I'd say 2 to 3% is reasonable, depending where you sit on the optimist/pessimist scale.
https://swanlowpark.co.uk/retail-price-index
https://swanlowpark.co.uk/consumer-price-index
1% feels too low & go much higher than 4% & you'll kill your forecasts without real proof it's valid. I'd say 2 to 3% is reasonable, depending where you sit on the optimist/pessimist scale.
https://swanlowpark.co.uk/retail-price-index
https://swanlowpark.co.uk/consumer-price-index
Just to add, "real" returns are typically between 3-6% p.a. for equities (I'd call it 4.5%) and 2% for bonds. Both of these figures are before the dreaded "charges" so you'll need to scale back accordingly.
In very round numbers and being a cautious fellow I'd use something like 3% real for equities and 1% real for bonds.
However, I'm no expert and someone who knows what they're doing may be along in a minute...
In very round numbers and being a cautious fellow I'd use something like 3% real for equities and 1% real for bonds.
However, I'm no expert and someone who knows what they're doing may be along in a minute...
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