What inflation rate estimate is appropriate for my country?

What inflation rate estimate is appropriate for my country?

Greg BeckerGetGuidance.com2013

What inflation rate estimate is appropriate for my country?

In this slide deck, we cover the following:1. What is inflation?2. Why is inflation forecast?3. Why are inflation projections unreliable?4. Who makes inflation forecasts?5. Who is the IMF?6. What is a good estimate for each country?7. Why does inflation differ between countries?8. How

might inflation impact the real value of my cash savings?

9. Final Words

What is inflation?

• Inflation can be defined as a measure of the change in the general level of prices for goods and services.

• Inflation is normally measured as a rate per year, and is a measure of how much goods and services are likely to change in value over a year.

• Deflation refers to a negative value of inflation.

• Inflation erodes the value of money

Example:• Consider a basket of goods

and services that representing what people purchase cost $x

• If n years later that same basket of goods would cost $y, then one would say that the inflation rate is:

1/nxy( ) -1

Why is inflation forecast?

• Fiscal Planning• Central banks with inflation targets need to manage their policies

relating to money supply to ensure that inflation targets are met• Investment decision making

• Some investment classes have a rate of return that is independent of inflation, and others have a rate of return which is a rate above inflation• When inflation forecasts are high, investments that offer a real rate of

return (i.e. a return above inflation) are more valuable• When inflation rates are stable, assets with a high nominal return (i.e. a

return independent of inflation) may be the best value• Personal Financial Planning

• An individual’s consumption and expenditure rises with inflation• Projecting your assets and income taking into account the effect of

inflation can help to ensure that you invest in the right asset classes, that you invest enough, and that you live within your means

Why are inflation projections unreliable?• Poor past data

• The data used to make past estimates is often revised• The factors that influence inflation are complex and intertwined

• Many factors influence inflation• A change in any can have a profound impact on inflation in the short,

medium or long term• The duration of the forecast

• Over an extended period, a small error can compound• Many estimates are available, and none of them may be correct

• Forecasts are based on all available information, but things change• For example, political factors can lead to a step change in anticipated

inflation• The individual, organisation or body may be biased in the

estimates they produce• This could be intentional or by chance• It is important that your source is reliable and expert

Inflation Forecasters

Investment companies

Traders

Think tanks

GovernmentsNon Governmental organisations e.g.

IMF

Central Banks

Investment Banks

Who makes forecasts?

Who is the IMF?IMF = International Monetary Fund

• The IMF is the International Monetary Fund, and it describes itself as

The International Monetary Fund (IMF) is an organization of 188 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable

economic growth, and reduce poverty around the world.

• The IMF produces various economic statistics, and includes them in it’s World Economic Database. The April 2013 edition can be accessed here:http://www.imf.org/external/pubs/ft/weo/2013/01/weodata/index.aspx

What is a good inflation estimate for each country?What is our approach?

• We have taken the annual estimates for the period 2013-2018 from the IMF’s World Economic Database and calculated the geometric mean

• For example, in the case of the United Kingdom, the estimates for the 5 years were

2013: 2.50% 2014: 2.25% 2015: 2.07% 2016 :1.92% 2017: 1.97%

• The 5 year geometric mean is 2.14%• The advantages of this approach include:

• It is simple• It gives a single point estimate of the inflation rate• A rate can be developed for more than 180 countries• The standardised approach used by the IMF allows for inter-country comparison• The estimate has been compiled by impartial experts

• Disadvantages• The estimates are out of date and do not reflect real time developments• The single data point does not capture the impact of the uncertainty, and a range

or probability density function may be more appropriate

Annual Inflation Estimate for 2013-8Data is from the IMF’s April 2013 World Economic Outlook Database

Country RateAfghanistan 5.2%Albania 2.9%Algeria 4.1%Angola 7.4%Antigua and Barbuda 2.9%Argentina 10.1%Armenia 4.0%Australia 2.5%Austria 1.9%Azerbaijan 6.4%The Bahamas 2.0%Bahrain 2.0%Bangladesh 5.7%Barbados 4.4%Belarus 19.3%

Country RateBelgium 1.2%Belize 2.0%Benin 2.9%Bhutan 7.3%Bolivia 4.1%Bosnia and Herzegovina 2.0%Botswana 6.6%Brazil 4.5%Brunei Darussalam 1.6%Bulgaria 2.6%Burkina Faso 2.0%Burundi 5.4%Cambodia 3.3%Cameroon 2.5%Canada 2.0%

Annual Inflation Estimate for 2013-8Data is from the IMF’s April 2013 World Economic Outlook Database

Country RateCape Verde 2.7%Central African Republic 2.1%Chad 3.0%Chile 3.0%China 3.0%Colombia 3.0%Comoros 3.3%Democratic Republic of the Congo 7.5%Republic of Congo 2.8%Costa Rica 5.0%Côte d'Ivoire 2.5%Croatia 2.4%Czech Republic 2.0%Denmark 2.0%Djibouti 2.5%

Country RateDominica 2.0%Dominican Republic 4.2%Ecuador 3.3%Egypt 9.1%El Salvador 2.6%Equatorial Guinea 5.0%Eritrea 12.3%Estonia 2.6%Ethiopia 9.1%Fiji 3.0%Finland 2.1%France 1.6%Gabon 3.0%The Gambia 5.1%Georgia 5.0%

Annual Inflation Estimate for 2013-8Data is from the IMF’s April 2013 World Economic Outlook Database

Country RateGermany 1.8%Ghana 7.6%Greece 0.7%Grenada 2.6%Guatemala 4.2%Guinea 6.5%Guinea-Bissau 2.1%Guyana 4.7%Haiti 3.6%Honduras 5.6%Hong Kong SAR 3.5%Hungary 3.1%Iceland 2.9%India 8.5%Indonesia 5.4%

Country RateIslamic Republic of Iran 20.7%Iraq 5.5%Ireland 1.6%Israel 2.0%Italy 1.4%Jamaica 6.7%Japan 2.2%Jordan 2.4%Kazakhstan 6.1%Kenya 5.0%Kiribati 2.5%Korea 3.0%Kosovo 1.5%Kuwait 4.0%Kyrgyz Republic 6.2%

Annual Inflation Estimate for 2013-8Data is from the IMF’s April 2013 World Economic Outlook Database

Country RateLao P.D.R. 4.4%Latvia 2.2%Lebanon 2.1%Lesotho 5.1%Liberia 5.0%Libya 4.1%Lithuania 2.4%Luxembourg 1.9%FYR Macedonia 2.0%Madagascar 5.6%Malawi 5.1%Malaysia 2.4%Maldives 4.6%Mali 2.7%Malta 2.1%

Country RateMarshall Islands 2.0%Mauritania 5.4%Mauritius 4.9%Mexico 3.1%Micronesia 2.4%Moldova 5.0%Mongolia 7.7%Montenegro 1.8%Morocco 2.6%Mozambique 5.6%Myanmar 5.0%Namibia 4.8%Nepal 6.8%Netherlands 1.5%New Zealand 2.1%

Annual Inflation Estimate for 2013-8Data is from the IMF’s April 2013 World Economic Outlook Database

Country RateNicaragua 7.1%Niger 1.6%Nigeria 7.2%Norway 2.1%Oman 3.4%Pakistan 10.9%Panama 3.8%Papua New Guinea 6.0%Paraguay 4.5%Peru 2.1%Philippines 3.2%Poland 2.3%Portugal 1.4%Qatar 4.6%Romania 2.7%

Country RateRussia 6.0%Rwanda 5.3%Samoa 3.5%San Marino 1.3%São Tomé and Príncipe 3.7%Saudi Arabia 3.5%Senegal 1.6%Serbia 4.2%Seychelles 3.1%Sierra Leone 6.3%Singapore 2.8%Slovak Republic 2.2%Slovenia 2.0%Solomon Islands 4.5%South Africa 5.1%

Annual Inflation Estimate for 2013-8Data is from the IMF’s April 2013 World Economic Outlook Database

Country RateSouth Sudan 5.1%Spain 1.5%Sri Lanka 6.2%St. Kitts and Nevis 2.5%St. Lucia 2.9%St. Vincent and the Grenadines 2.5%Sudan 16.5%Suriname 4.0%Swaziland 5.2%Sweden 2.3%Switzerland 0.8%Taiwan Province of China 2.0%Tajikistan 6.8%Tanzania 5.2%Thailand 2.4%

Country RateTimor-Leste 8.0%Togo 2.8%Tonga 5.4%Trinidad and Tobago 4.0%Tunisia 4.3%Turkey 5.1%Turkmenistan 5.1%Tuvalu 2.7%Uganda 5.0%Ukraine 4.9%United Arab Emirates 2.0%United Kingdom 2.1%United States 2.0%Uruguay 6.4%Uzbekistan 11.0%

Annual Inflation Estimate for 2013-8Data is from the IMF’s April 2013 World Economic Outlook Database

Country RateVanuatu 2.8%Venezuela 23.5%Vietnam 7.7%Yemen 8.2%Zambia 5.1%Zimbabwe 4.0%

Why does inflation differ between countries?

• Inflation rates go up and down with prices• Some prices are set locally, and some have a meaningful

international component• The cost of cleaning services is not a globalised product, and the price is

determined locally• Oil and petrol are globalised products, with the price of oil set globally

with adjustments for local refining costs to determine local prices• Differences in the change in local prices lead to differences in

inflation• A change in a country’s exchange rate can lead to imported

inflation• For example, if your currency falls, all imported goods and services will

increase in price, and be reflected as an increase in inflation

How might inflation impact the real value of my cash savings?Try the calculator from GetGuidance.com

• The impact of inflation on your savings can be worked out mathematically.

• This online calculator allows you to work out the impact of inflation on your savings, and explore various scenarios:

How might inflation impact the real value of my cash savings?

Final Words

• Point estimates have limitations• an inflation rate is best described as a likely range, for example there is a

90% chance that the rate is likely to be between 3% and 5% with an average of 3.8%

• The limitations of any estimate should be remembered• It is immediately out of date• Anticipated inflation rates can change quickly due to forces beyond

anyone’s control• Always search for more recent estimates, and look on places

like the IMF’s website, or in The Economist magazine• You can explore the impact of inflation on your savings,

investment and retirement plans at GetGuidance.com

GetGuidance is an unbiased, online guidance platform that offers users relevant personalised information, and together with simple next steps helps users make decisions and take action where necessary to improve their health and wealth .