Inflation Rate

[KenBob]

For my calculations, the inflation rate is critical for valuing stocks in comparison with bonds and in determining what growth rate is acceptable.

The issue is which inflation rate to use. I have been using the latest historical inflation rate (-0.20% for April); however, this is not a forward look at inflation. All investment calculations should use forward data rather than backward looking data.

The Federal Reserve makes inflation forecasts. While not definitive, these forecasts should be better than using historical data. The available forecasts are for the current, next two years, and the longer run. I have decided to use the longer run inflation forecast (2%) from the Federal Reserve, since this more closely matches the 5 year projections being used for other data.

[Dividend Watcher]

Ken, that is probably the wiser choice to use as an inflation rate benchmark.

I use a flat 4% long-term rate as my everyday benchmark. If I can keep the whole portfolio's income growth rate above that, I am happy.

[Caversham]

(05-30-2015, 09:40 AM)Dividend Watcher Wrote: Ken, that is probably the wiser choice to use as an inflation rate benchmark.

I use a flat 4% long-term rate as my everyday benchmark. If I can keep the whole portfolio's income growth rate above that, I am happy.

I agree with Dividend Watcher and use 4%.

My understanding is that the Fed uses an inflation rate that does not include food and energy. Economists exclude these because they are "volatile." They don't seem volatile to me, they only seem to go up.

I would use the CPI which includes food and gas and which averaged 3%-4% over the last century.

Just as most people are conservative when evaluating a company's value, I find it better to be aggressive when dealing with inflation (ie more margin of safety).