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Does Inflation affect Senior Citizen differently?

The U.S. Bureau of Labor Statistics (BLS) thinks so. Ever since the early 1980s, the agency has calculated a separate consumer price index for elderly consumers (CPI-E), which can more accurately reflect the spending habits of older Americans. This is because housing presents a greater expense for the elderly, when you consider many pay high fees for assisted living and nursing home care. Health care expenses can assume a greater proportion of the elderly household budget than for the rest of the population. The CPI-E takes this expense into consideration and applies greater weight to this category when determining the rate of inflation. Since its inception, housing and health care costs have risen at a faster rate than other weights, such as transportation, education and food.1 

Social Security benefits, however, are automatically adjusted for inflation each year against the CPI-W, a measure that captures price changes in the average set of goods purchased by urban consumers. So the adjustments to Social Security benefits are based on wage earners and clerical workers. But as you can see, this inflation adjustment may not accurately help retirees keep pace with the rate of their own inflation.2 

There has been some speculation that Social Security benefits should be adjusted using the CPI-E or other inflation measure that more accurately reflects the spending habits of the elderly rather than working Americans. Yet with all of the brouhaha concerning the federal budget and the national deficit, the current sentiment is headed in a different direction. In fact, President Obama's Administration has proposed changing the basis for Social Security inflation adjustments to the "chained CPI" in order to slow the growth rate of benefits. The chained CPI takes into account consumers' tendency to substitute higher inflationary items with lower-cost alternatives when necessary, thus yielding a lower rate of inflation growth.3

Unfortunately, for retirees, their inflationary items - such as medical care and senior housing - do not lend themselves as efficiently to shopping for lower-cost alternatives of equal quality. 

Bureau of Labor Statistics, "Current Price Topics: The Experimental Consumer Price Index for Older Americans," February 2012;http://www.bls.gov/opub/focus/volume2_number15/cpi_2_15.htm .
Bloomberg Businessweek, Why 'Chained CPI' Rattles the Elderly (andhttp://www.businessweek.com/articles/2013-04-10/why-chained-cpi-rattles-the-elderly-and-soon-to-be .


Info compliments of Andre Rafal arafal@strategyfinancialgroup.com.