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What's the right number for inflation and inflation standard deviation?

Posted: Tue Jun 13, 2017 9:15 pm
by GDK
If ever there was a question for which nobody has an answer, this is probably it. But inflation is either enemy #1 or close to it for retirement planning from what I can tell.

I use an average and standard deviation of consumer price index numbers back to the early 1990s -- 2.7% average and 1.1% standard deviation. I limit the averaging back to the early '90s because I believe that our government and/or the Fed now have methodologies to control inflation that were not in place and/or were not used in years prior -- especially many years prior. I've been told by the folks at Financial Engines that they use 3% for an average -- the rationale behind the 3% was unknown.

But these numbers are so hugely important -- what do other folks use? And perhaps more importantly, has someone of credible reputation had a revelation regarding guidelines and criteria for what a good guess would be for these numbers?

Any insights would be appreciated!

Thank you!

Re: What's the right number for inflation and inflation standard deviation?

Posted: Wed Jun 14, 2017 10:04 am
by FRPJunkie
GDK wrote:If ever there was a question for which nobody has an answer, this is probably it. But inflation is either enemy #1 or close to it for retirement planning from what I can tell.

I use an average and standard deviation of consumer price index numbers back to the early 1990s -- 2.7% average and 1.1% standard deviation. I limit the averaging back to the early '90s because I believe that our government and/or the Fed now have methodologies to control inflation that were not in place and/or were not used in years prior -- especially many years prior. I've been told by the folks at Financial Engines that they use 3% for an average -- the rationale behind the 3% was unknown.

But these numbers are so hugely important -- what do other folks use? And perhaps more importantly, has someone of credible reputation had a revelation regarding guidelines and criteria for what a good guess would be for these numbers?

Any insights would be appreciated!

Thank you!
Personally, I use 2.0% for the Inflation - Average field, and 1.0% for Inflation - Std Dev field.

Historically (going back many, many decades) the inflation average has been 3.22%:

https://inflationdata.com/Inflation/Inf ... lation.asp


But as you note, it's been been below that for 20+ years. Might it go up? Possibly. But I feel safe with these values. There is no right answer. Hope this is helpful.

Re: What's the right number for inflation and inflation standard deviation?

Posted: Wed Jun 14, 2017 11:29 am
by GDK
Great data, thank you for the response!

Re: What's the right number for inflation and inflation standard deviation?

Posted: Thu Feb 06, 2020 1:58 am
by ebcinmv
Updated info on inflation rates as of Jan 14, 2020:

https://inflationdata.com/Inflation/Inf ... aspx#table

The idea of using the mean and standard deviation of inflation rates since 1990 makes sense to me, given modern methods for managing inflation. I calculated these for 1990 to end of 2019, and the mean is 2.45%, SD = 1.1343.

Hope this is helpful to the next person wondering what to enter for these values!

Re: What's the right number for inflation and inflation standard deviation?

Posted: Thu Feb 27, 2020 11:00 am
by Tanker_62
Great, that helps a lot! I did use the average inflation rate from 1990 to 2019, and I'm glad it was the right choice and that I wasn't grossly mistaken.