**from Nords**
**"After reading statements like this about a thousand times, for once I'm struck with a new thought... how hard would it be to add a correlation component to the variations of Monte Carlo parameters?"**
Financial engines sort of addresses this issue in its monte carlo simulations. They do corelate one years inflation to the next and real returns are impacted by inflation.

pulled from their site ....

**To estimate the value of your investments, we need to account for the impact of inflation. If the growth rate of your investments is higher than the rate of inflation, then your investments will be worth more in the future than today. **
**Real rates of return**
If your investments grow at 4% and inflation is also 4% that year, you're not making any real progress--you're just treading water financially.

The reason: if inflation of 4% requires you to spend 4% more next year to buy the same things you bought this year, the return means you are barely keeping up. In fact, if you need to pay income tax on the 4% earnings, your standard of living may actually go down.

**To see how you're really doing financially, you need to know your real rate of return--after inflation. If your investments earn or grow by 10% and the inflation rate that year is 4%, then your real rate of return is the difference: 6%. **
**How we model inflation rates**
**Inflation rates tend to vary over time. When modeling portfolio values, it is very important to consider the possibility of different future inflation rates, as they will definitely affect your standard of living in retirement. **
**We assume that U.S. inflation rates will vary mostly (14 times out of 20) between 1% and 5% per year, but almost always (18 times out of 20) between 0% and 11%. In extreme cases (1 chance in 20), we assume that these rates can exceed 11% or fall below 0% (deflation). **
**Putting it all together**
How do these three factors of future rate uncertainty, the current year's inflation rate affecting the following year's rate (persistence), and the tendency to return to an average rate (mean reversion) all fit together? Here's an example to explain how these three factors of inflation work with one another:

Suppose the inflation rate this year is 10% and the goal is to estimate next year's inflation rate.

The uncertainty factor alone means that a large range of inflation rates (say, from 0% to 20%) should be considered. But this range is too broad, considering the persistence factor.

The persistence factor says that a 10% inflation rate this year implies a similar rate next year. The combination of the uncertainty factor with the persistence factor narrows the likely range of inflation to 7% to 13%.

However, this 7% to 13% range of inflation doesn't consider the third factor (mean reversion) which says that inflation tends to return to its long-run average (now estimated at 3.5%). This factor lowers the estimate of next year's inflation to a range of 5% to 11%.

All of these estimated calculations are based on the history of inflation rates over the past 50 years, as well as changes from year to year and from decade to decade.