Average inflation

As a quick rule of thumb, investors have in mind that the average inflation in the USA is 3.3%, but... is it true?

First of all, let´s look at the official statistics from the Bureau of Labor Statistics. According to them, as we see on the graph of the right, the standard deviation of the average inflation from 3 to 100 years is not that much. Of course, as we could have forecast, with time, it gets more stable. And yes, we could say that an average inflation of 3.5% makes sense for long-term calculations, such as retirement.

However, how will all the QE affect inflation? Usually, it takes up to two years to start seeing the effects. QE1 should be almost done, and QE2 should finish in August 2013. But still, we don´t see much inflation even after "printing money", why? Because the new money is going to the balance sheets of the banks and it´s not flowing outside but to buy public debt (trick or trick?).

The last months inflation has shown some deflation on the other hand,  so probably the QE was needed and has been done properly:

- 2011 (%): August (0.28), September (0.15), October (-0.21), November (-0.08), December(-0.25).
- 2012 (%): January (0.44).

The second question that arises is if we can trust the CPI calculated by the Bureau of Labor. Somehow, we all have a feeling that "real" inflation is much higher. There are many non-official calculations, but as a rough estimate they duplicate the CPI every year. Please, check out this interesting web.

So, if we need to work on our retirement calculations and we don´t trust the official numbers, we might go for a safe average inflation of 7%. Of course, the numbers are going to be much worse!