Should inflation be considered in the reserve study?
Inflation should generally be considered in the reserve study. Let's face it cost do not remain the same they increase over time, except in periods of deflation. Our review of inflation over the past 80 years tells us that there has not been a single deflationary year during that time period. The question is not really whether inflation should be considered, rather it is how much should that inflation factor be. Again, in examining and 80 year history there have been significant swings between years and inflation. However in the examining a moving 30 or 10 year average, it becomes apparent that inflation rarely goes above 4%. Therefore we feel comfortable in using a 3% or 4% inflation factor because the funding projection covers a 30 year period.
Since most funding plans for research studies include an interest earnings assumption, you must also include an inflation factor to offset the distortion in funding that would be created by the inclusion of interest earnings if inflation were not considered.