The other day someone mentioned to me a rule of thumb that he was using to estimate the number of years \(n\) it would take for inflation to destroy half of the purchasing power of today’s money: \[ n = \frac{70}{p}\] Here \(p\) is the inflation in percent, e.g. if the inflation rate is \(2\%\) then today’s money would buy only half of today’s goods and services in 35 years.
Over the last year I worked with two colleagues of mine on the subject of inflation and claims inflation in particular. I didn’t expect it to be such a challenging topic, but we ended up with more questions than answers. The key question and biggest challenge is to define what inflation, or indeed claims inflation actually is and how to measure it. We published a summary of our thoughts and findings in this month’s issue of The Actuary.