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Willis Jeffords | What interest rate is generally used as an estimate of future inflation? |
This is for retirement planning purposes. Thanks!
Additional Details
If you know your source, please cite it |
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derobake
 |
I think you may have the cart before the horse. Inflation is one factor that drives interest rates, not the other way round. Yes, lenders and the Fed will use estimates of inflation in the near future to make decisions on what interest rates to use. If future inflation is expected to be higher, interest rates will generally rise. However, interest rates are also determined by factors other than inflation. So, you cannot pick an interest rate and say, "this is the expected inflation rate over the next ____ years."
Unfortunately, there is no good way to estimate future inflation. You can track current inflation and you can see what has happened in the past. From 1926 to 2000, inflation was annualized at about 3.1%. However, from 1950 to 2000, inflation annualized at 4%. And, during the 1970s, inflation was annualized at about 7%.
The Fed will use its monetary policy to try to maintain inflation within the 2 - 3% range, but there is no guarantee they can accomplish this.
For retirement planning, most people suggest using annual inflation estimates of 3%, 3.5%, or 4%. |
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ziggydiggy1
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Inflation in stable, mature economies is generally estimated at 3% per year. However, strictly speaking that is not an interest rate. It only represents the rate at you would need to earn to maintain equal purchasing power.
When you invest in anything, there is also minimum rate of return you will need to receive to give up even if you have absolute no risk of losing money on an investment.
(1+inflation) x (1+real interest rate) = (1+riskfree interest rate)
General, these are the numbers used
Inflation ==> Consumer Price Index
Riskfree ==> Federal Reserve "Discount Rate"
So, if you are 'inflating' present monthly expenses into the future you'll only want to use inflation only. However, if you are investing, the minimum you should receive (on average) would have to be the risk free rate. |
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Tats
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You are really asking two questions: 1. What if the future rate of inflation and 2. What is the future interest rate?
To get at a future interest rate, you can look at the current yield on a 10-year Treasury. Currently this is just around 5%, so 5-6% is a good number.
However this gives you nominal interest rate... that is, it includes an inflation number. So your second question is what is the rate of inflation?
If you take the yield on an Inflation Protected Treasury, again, 10 year Treasury (called TIPS), and subtract it from the regular Treasury, the difference will give you what the market believes is future inflation. The current yield for a 10 Yr TIP is 2.73. So your difference is 2.4%, which is the expected rate of inflation.
In the last decade or so, inflation has run between 2-3% and this is expected to continue. |
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Ginger
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I would suggest 3-4%. Check out this website for calculators for many different investments. |
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006
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Lots of them. Nominal interest rate is the one you're looking for, I believe.
If you want to hedge against inflation, there are inflation protected bonds and stocks are also protected against inflation. |
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words_smith_4u
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I am using 3% per year |
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greenbull21
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Inflation is usually considered 3% per year |
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Martin S
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About 4% a year. Because sometimes its 5% and sometimes its 3%, so 4% is a good estimate. |
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