Historical US Inflation and US Health Care Inflation Rate
These web sites can help you determine what inflation rates you want to use in your simulations:
Isn't it a component of general inflation? I think someone on another thread mentioned they use 2%, which would be additive to general inflation of (historical) 3.22%, or am I missing something?
Yes it is, but Medicare premiums are, I believe, based on medical costs. So I assume in PRC the 2% additional increase you input is for Medicare premiums and out of pocket costs, Stuart??
If you want to go into the weeds on this topic check out this link: https://www.chicagofed.org/publications/chicago-fed-letter/2018/407
Looks like Health Care costs increased 6% in 2020 and expected to increase 7% this year: https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/rising-inflation-will-affect-health-care-costs.aspx
Measuring Price Change in the CPI: Medical care
The medical care index is one of eight major groups in the Consumer Price Index (CPI) and is divided into two main components: medical care services and medical care commodities, each containing several item categories. Medical care services, the larger component in terms of weight in the CPI, is organized into three categories: professional services, hospital and related services, and health insurance. Medical care commodities, the other major component, includes medicinal drugs and medical equipment and supplies.
The following topics that are frequently confusing to the public are explained in this factsheet: expenditure methodology, health insurance, prescription drugs, professional services, and hospital services.
General CPI methodology
The CPI measures inflation by tracking retail prices of a good or service of a constant quality and quantity over time. Tracking retail prices allows CPI to capture changes in out-of-pocket household spending over time. Each month, the various item indexes reflect the observed price changes, aggregating up to the all items CPI.
In the aggregation process, each item index is assigned a relative importance, or weight. The weight of each item in the CPI is determined using the Consumer Expenditure Survey (CE) which collects information from the nation's households and families on their buying habits (or expenditures), income, and household characteristics. Goods and services that consumers spend the most on will be the most heavily weighted. Additional information on CE and how weights are calculated and updated can be found in the CPI and the CE sections of the BLS Handbook of Methods.
Medical care methodology
The CE tracks consumer out-of-pocket spending on medical care, which is used to weight the medical care indexes. CE defines out-of-pocket medical spending as:
- patient payments made directly to retail establishments for medical goods and services;
- health insurance premiums paid for by the consumer, including Medicare Part B; and
- health insurance premiums deducted from employee paychecks.
Thanks, and all this is good stuff, but in the end, I'm simply trying to determine what % I should consider for each of the two inflation cells in PRC, general and healthcare, and since healthcare is (apparently) one of eight components that make up general inflation, I'm not sure I've ever run across a reliable source that clearly isolates that one-eighth from the rest, nor why its necessary to even have it separated out if its already part of general inflation. I welcome your thoughts PRC community!
And while we're on the inflation topic - is anyone adjusting general inflation up (over historical 3.22%) since as of today we're are 5.4-5.6%?
@giovanelli766 PWC report has it as 7% for 2020 and 6.5% projected for this year. So if PRC wants the difference between general rate and HC rate, it could be: 6.5% (HC)- 3.2% (general) = 3.3% (real healthcare cost inflation rate)
@nc-cpl Reality trumps precision "Walter E. Goh" The answer to your question, what inflation rates to use, is - nobody knows 😎. Just like real rate of return (ROR) for your investments over the next 30 to 40 years is an unknown. The best you can do is use historical rates and then tweak them. Will inflation stay high or go back to historical levels, don't know. Inflation shot up because of a messed up supply chain caused by a once in a century global pandemic, a Black Swan event to be sure. An yet the S&P 500 went up about 14% in 2020 and is up about the same so far this year. I dare say few if anyone predicted that.
What I have seen is more effort being put into determining your retirement funds withdraw rate (WR). This starts with the 4% rule (which is actual 4.3%). Take your retirement funds and withdraw 4.3% year after year adjusted for inflation for 30 years. The rule states that you will not run out of money in the ensuing 30 years based on history. Of course this assumes the 4.3% withdraw will actually provides your annual spend rate (the amount of money you need/want to live on). Setting up your initial WR is where the stock market valuation comes into play. In Michael H. McClung's book Living Off Your Money 2015 chapter 9 explains this well, although it does get technical. Using valuation indicators CAPE10, Q Ratio, and iCAGR20, you would adjust the 4.3% WR taking these 3 indicators into account. To make that calculation a little easier, he does offer a spreadsheet at https://mhmcclung.gumroad.com/l/OfsGt/free.
The bottom line is what rates to use for inflation and ROR is 51% guess work on your part and 49% guess work by others. Figuring out how much leeway you have in adjusting you WR each year in retirement is, in my option, more important. Take your retirement funds, determine what 4.3% of that is, and compare that to how much money you need/want to live on. If that does not generate the money you need, you either need to save more and spend less. Then, using the historical rates of inflation and ROR, repeat for years 2 through 30. Walla, retirement planning solved 🍕 🍻