Impact of inflation on financial planning

Some economists forecast the inflation rate to increase to 4% to 5% during the first quarter of 2008. Many people are worried? How does a higher rate of inflation affect their financial planning?

The increase in inflation rate in recent months is due to some temporary factors, such as the increase in Goods and Services Tax and the sharp increase in oil price. The impact is likely to diminish over the next 12 months.

For financial planning, we have to look at inflation rate over the long term. Over the past ten years, the average was less than 1%. Even if we allow for the large increase expected for this and next year, the average is still lower than 2%. In the future years, it is quite adequate to
allow for inflation at average of 2% a year.