Financial planning projections maintain long-term inflation rate of 2.1%

Despite sticky inflation that many economists think may be difficult to rein in, FP Canada says financial planners should continue to assume an inflation rate of 2.1% for long-term planning.

FP Canada and the Institut québécois de planification financière (IQPF) published their 2023 Projection Assumption Guidelines on Friday. The guidelines are designed to help financial planners make projections for 10 years or more.

The latest guidelines come as inflation is slowing in Canada but remains well above the Bank of Canada’s 2% target. Canada’s annual inflation rate fell to 4.3% in March, down from 5.2% in February and from a peak of 8.1% last June.

The Bank of Canada has held its key interest rate at 4.5% at its last two meetings after hiking aggressively over the previous year. The central bank expects the inflation rate to fall to 3% by mid-year and down to 2% by the end of 2024.

“However, getting inflation the rest of the way back down to 2% could prove to be more difficult,” the central bank stated when releasing its latest rate decision earlier this month.

FP Canada’s standards panel, an independent panel that makes the guidelines and comprised of CFP professionals, would seem to have faith in the central bank’s ability to bring inflation back under control.

However, FP Canada and the IQPF noted in their release on Friday that the projections are to be used for long-term planning and “meant to look beyond the current day rate environment. For shorter-term financial projections (less than 10 years), financial planners may use actual rates of return on fixed-term investments held to maturity and dividend yields on equities.”

The 2.1% inflation projection in the planning guidelines is the same as in last year’s report.

The inflation assumption is based on actuarial reports from the Canada and Quebec pension plans, the latest FP Canada/IQPF survey, and the Bank of Canada’s target inflation rate.

The assumption guidelines also include return projections. The associations project Canadian equities to return 6.2% over the coming decade, compared to 6.5% for foreign developed market equities and 7.4% for emerging market equities.

Fixed-income investments are projected to return 3.2%, up from 2.8% last year after 2022’s bond rout.

The borrowing rate, which is equal to the return assumption for 91-day T-bills plus 2%, was unchanged from last year’s forecast at 4.3%.

The yearly maximum pensionable earnings growth rate assumption is 3.1%.

The report included an addendum showing the consumer price index from 1997 to 2022. As of December 2022, the consumer price index has averaged 3.03% over the past five years and 2.21% over the past 10 years.