Investment

What should we assume the rate of inflation to be in 12 months?

By December 4, 2020 No Comments

Each year Henwood Court undertakes an assessment on what the long-term rate of inflation is expected to be. This will then be used within client financial plans. The rate of inflation is probably the most important variant in all of the economic numbers we use in financial plans. It will impact on the expected rise in future expenditure, assumed increases to inflation protected pensions (including the state pension), while it interacts with other assumptions on cash returns, investment, and property growth. Due to the compounding effect, even just a 1% variant on inflation can have a significant positive or negative impact on future cash flow forecasting.

The current rate of CPI is 0.7% and RPI 1.3%. This has been flattened of course due to the reduction in consumer spending as a result of Covid-19. You, like me, I am sure have had to cancel or defer our trips away, while trips to the shops have been curtailed. This has had a disinflationary effect.

Looking forward, the uncertainty created by the global pandemic makes inflation forecasting very difficult, particularly if you then throw in the impact of Brexit.

However, while we may see inflation bounce back to levels pushing 3% or 4% next year as pent-up consumer spending gets released, most experts predict inflation will settle down to the government’s target rate of 2% in the medium to longer term.

Over the past 12 months we have assumed inflation will be 2.5%, and it will be no surprise, given the expectations, that this is the rate we will continue to use in client’s financial plans. This takes the government’s target return, and for prudency, adds 0.50% to the rate, making our cash flow forecasting a little more cautious.

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