Calculating the effect of inflation

jamborino

Is there a quick or easy way of calculating the effect of inflation over a set period on a given sum?

For example, if I have today an amount of £10k to invest in a savings account at a fixed rate of interest for a set amount of years I can use a compound interest calculator to find out what that sum would grow to by the end of the period.
But that doesn't tell me what that figure is actually worth in real terms - I need also to factor in the effect of inflation to know what it would buy me at today's values - is there an easy way of doing this?
Many thanks.

dunstonh

Easiest way is to do an annually increasing pension that goes up by RPI or NAEI. That way, you don't really have to worry too much about real terms or future terms.

If the insurance company projection doesnt project on SMPI basis (7% minus 2.5% for inflation) then look at the 5,7 & 9 % projections and use the 5% figure. At the end of the day, forecasting for inflation is guesswork.

cheerfulcat

Hi,

Thisismoney has, among other calculators, one for inflation -

http://www.thisismoney.co.uk/tools-and-calculators/calculators/index.html?in_page_id=86

You have to pick your own figure for future inflation. I use 4%.

HTH

Cheerfulcat

Pal

You simply have to knock off your inflation assumption from the interest rate you use E.g. if RPI is 3% p.a. your interest rate becomes 5%-3% = 2% net.

E.g.

£10,000 invested at 5% p.a. for 10 years will have grown to £16,288

But in real terms it is £10,000 invested for 10 years at 2% p.a. = £12,190

Obviously a lot hinges on your RPI assumption!

deemy2004

Forget worrying about future inflation............

Index linked government stock

Pal

As long as you haven't paid double the face value to buy them...

DavidLaGuardia

Another way of calculating what a future sum would be worth in todays terms is the following

Say £10,000 in ten years time

If 3%p.a. inflation assumed

multiply 1.03 x 1.03 (on a non scientific calculator press the equals button 9 times i.e. on less than the number of years)
or
do 1.03 to the power of 10 on a scientific calculator
(=1.03^10 on a spreadsheet such as Excel)

divide £10,000 by the answer = £ 7,440