Adjusting Equity Index Returns for Inflation

Summary

This document asks how to distinguish nominal growth in an equity index tracker from growth in purchasing power. Using a UK all-share tracker and UK inflation as an example, it considers whether historical tracker values can be adjusted by inflation measured over the same period. The central practical question is whether dividing the index value by an inflation measure gives a suitable real-value series.

The text frames the problem but does not present a calculation, a specific inflation index, or an answer. In particular, it does not explain how to align index and inflation base dates, handle inflation reported as a rate versus a price index, or account for dividends and tracker fees. It is useful as an introduction to the distinction between nominal and inflation-adjusted performance, but readers would need further guidance before constructing a reliable real-return series.

Key ideas

• The document distinguishes nominal index-tracker growth from growth after accounting for inflation.
• It asks whether a tracker series can be adjusted using inflation measured over matching dates.
• Dividing by an inflation measure is proposed as a possibility, but the document does not confirm the method.
• The question does not specify an inflation index, base-date convention, or treatment of dividends and costs.

Tags

# Index tracker and inflation


# Index tracker and inflation












I'm trying to get my head around how inflation really affects index trackers. I've been looking at this question, but somehow misses the point I want (How To Account For Inflation Over Historical Data).

Lets take FTSE ALL UK index tracker and UK inflation as an example: Would it make sense to adjust the FTSE ALL against the inflation measured during the same period to be able to visualise the real FTSE growth? If it make sense, how would you do it exactly? Would it be as straight forward as divide the tracker value per inflation value?

Just to make myself clear, the idea behind is to remove the growth component in the tracker due to inflation.

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