How do you keep pace with inflation?

Hibiscus_2

Hello everyone,

I would like to know how you work out what you need to earn on your savings to keep pace with inflation.

I read in the Telegraph October 18th, that a basic rate taxpayer needs a gross return of 6.5% merely to keep pace with inflation of 5.2% as measured by the Consumer Prices Index. While a higher rate taxpayer would need a gross return of 8.67% according to Defaqto.

However I cannot always rely on reading this useful bit of information when I need it. So can we work out a mathematical equation for each rate of taxpayer? Or is there a website which works this out for us? Or Martin-Can you add this feature to your website? And where do we get the current CPI rate of inflation?

I look forward to and appreciate your number crunching. Thank you!

jamieslucky7

http://www.mortgageloan.com/calculator/savings-taxes-inflation-calculator

The yellow block shows you the balance after tax and inflation.

Years: 1
Monthly Cont: $0
Amount currently invested: $10000
Expected rate of return: 6.5%
Expected inflation rate: 5.2%
Federal tax rate: 20%
State tax rate: 0%

6.5% means your $10000 will be worth $10000 a year from now. 5.5% means your $10000 will be worth $9924 a year from now.

TehJumpingJawa

I thought CPI was only useful as a means of comparing inflation rates between countries?
As a measure of true inflation it is wildly inaccurate, and depends very much of where you live, and the quantity & type of luxury goods you purchase (i.e. how wealthy you are)

jon3001

Hibiscus wrote: »

Hello everyone,

I would like to know how you work out what you need to earn on your savings to keep pace with inflation.

I read in the Telegraph October 18th, that a basic rate taxpayer needs a gross return of 6.5% merely to keep pace with inflation of 5.2% as measured by the Consumer Prices Index. While a higher rate taxpayer would need a gross return of 8.67% according to Defaqto.

However I cannot always rely on reading this useful bit of information when I need it. So can we work out a mathematical equation for each rate of taxpayer? Or is there a website which works this out for us? Or Martin-Can you add this feature to your website? And where do we get the current CPI rate of inflation?

I look forward to and appreciate your number crunching. Thank you!

Just basic maths.

Basic rate tax payer will pay 20% tax on the interest, leaving them with 80% of the interest.

5.2 / 0.8 = 6.5

Higher rate tax payer will pay 40% tax on the interest, leaving them with 60% of the interest.

5.2 / 0.6 = 8.67

CPI figures from here
www.statistics.gov.uk/cpi/

LesU

TehJumpingJawa wrote: »

I thought CPI was only useful as a means of comparing inflation rates between countries?
As a measure of true inflation it is wildly inaccurate, and depends very much of where you live, and the quantity & type of luxury goods you purchase (i.e. how wealthy you are)

As I understand it CPI is RPI minus things like the cost of mortgage interest, council tax and buildings insurance. One of the main reasons for using CPI is to allow comparison with European countries most of whom have not got a large number of owner occupiers.

Hibiscus_2

Thank you! This was exactly what I was looking for. Some basic maths. This is going to help me a lot now and in the future. I can also see where to look up the current CPI. Much appreciated.:T :j

Hibiscus_2

TheJumping Jawa-Thank you for your reply!
My article from the Telegraph said 'Based on RPI inflation rate of 5% which includes housing and mortgage cost the corresponding returns required would be 6.25% for a basic rate taxpayer and 8.33% for a higher rate taxpayer’

And we can reach these figures using Jon’s calculations, this time using RPI:
Basic rate taxpayer pays 20% tax so
5/0.8=6.25%

and Higher rate tax payer pays 40% tax on the interest so
5/0.6=8.3%

Great!

Personally I think it is better to go by the CPI as it forces you to look for a better rate and you know then that you are keeping up with inflation or also, allowing growth.

Hibiscus_2

Thank you! This website was very interesting as it shows exactly what you can expect after 1 year, and you are right, at 6.5% your money is exactly the same (it has kept up with inflation). If you put in a higher rate e.g. 7.2% it has kept pace with inflation but also grown. Can the dollar amounts be considered exactly the same in UK pounds? (i.e. is it just down to percentages, not currency?).