Inflation and Real Returns

A weighted index BLS collects consumer prices and weights items using household spending information. Housing, food and transport do not each receive an equal share simply because they are separate categories. Source 1.

Match the measurement window BLS reported 9.1% CPI-U inflation for the 12 months ending June 2022. That is a specific June-to-June period, not the full calendar year. Match the dates, currency and period of your investment return to your inflation measure. Source 3.

Close at low rates Subtracting 3% from 5% gives 2%, compared with the exact 1.94%. The shortcut can be useful for a rough estimate, but dividing growth factors is the exact calculation.

Larger differences at high rates At a fictional 10% nominal return and 20% inflation, the exact result is 1.10 ÷ 1.20 − 1 = −8.33%, rather than −10%. Convert percentages to decimals before calculating. A positive dollar return can still be a real loss. Source 2.

Use like-for-like inputs For an investment, include distributions in the return measure you use and state whether fees and taxes have already been deducted. A quoted yield or one month’s interest is not automatically a realized full-year total return.

Separate history from a scenario Use realized inflation to measure a past result; future inflation is an assumption. Deposits and withdrawals change balances without being investment gains. Keep those cash flows separate instead of treating all account growth as a return.

Series I savings bonds I bonds combine a fixed rate with an inflation component that resets every six months. They generally cannot be redeemed in the first 12 months; redemption before five years loses the last three months of interest. Standard electronic purchases are limited to $10,000 per taxpayer per calendar year. Check current Treasury rules and eligibility. Source 4.

Treasury Inflation-Protected Securities TIPS principal adjusts with inflation or deflation; interest is paid on the adjusted principal. At maturity, Treasury pays at least the original principal. That floor is not a guarantee of any premium paid, a fund’s price, or proceeds from selling early. Market prices can vary. Source 5.

Selling before maturity Government payment promises do not guarantee the market price of a bond sold early. Interest-rate changes can move bond prices. A bond fund also has a different structure from one bond held to its maturity date. Source 6.

Check the goal and the terms Compare liquidity, maturity, purchase price, tax treatment and the inflation measure used. Inflation-linked does not mean suitable for every purpose or protected against every personal expense increase. Read the issuer’s current terms before relying on a product.

Check future cost and today’s value Open the Inflation Calculator. At an assumed 3% for 30 years, $10,000 of spending today would cost about $24,273 later. Conversely, $10,000 received then has about $4,120 of today’s buying power. Check which direction the calculator is showing.

Write the assumptions down Record your dates, nominal return, inflation measure and whether fees or taxes are included. For a past period, use a matching CPI change; for the future, label inflation as an assumption. Explain why a positive statement balance can still lose buying power, and review the calculation when inputs change.