The inflation rate measures how quickly the general price level rises over a period. For retirement planning, it determines how spending and wealth evolve under inflation risk. section 5.7
Unlike independent stock-return shocks, inflation tends to persist: elevated inflation is often followed by elevated inflation, while gradually reverting toward a long-term average. An AR(1) process models this behavior. section 5.7
A practical workflow uses historical CPI data and then estimates and simulates the inflation process:
- Download CPI-U All Items data from FRED using the CPIAUCNS series. section 5.7
Recent annual changes
The year-over-year rate rose from 1.4% in 2020 to 7.0% in 2021, declined to 6.5% in 2022, and reached 3.5% in 2023. section 5.7
