Editorial Type:
Article Category: Research Article
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Online Publication Date: Apr 16, 2024

Two-Step Medical Inflation Forecasts: Econometric Performance and Related Issues

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Page Range: 49 – 68
DOI: 10.5085/JFE-492
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Abstract

This paper examines medical inflation forecasting based on a two-step method proposed by Gilbert (2019), whereby the medical inflation rate is forecast via the sum of two terms: a broad inflation published forecast and a historical average of the inflation gap—this being the difference between medical inflation and broad inflation. In a simple forecasting experiment, the two-step method compares favorably to the one-step method of forecasting medical inflation based on its past values alone. Stationarity tests applied to the inflation gap mostly support stationarity, with a possible historical break. The econometric results generally support the use of the two-step method, with a limited historical window for inflation gap averaging, consistent with Gilbert (2019).

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Copyright: © 2024 by the National Association of Forensic Economics
Figure 1.
Figure 1.

Broad Inflation and Its 10-Year Published FRBC Forecast

Figure 2.
Figure 2.

Broad Inflation and Its 10-Year Forecast from an AR(1) Model

Figure 3.
Figure 3.

Simulated AR(1) Time Series and Its 10-Year Forecast

Figure 4.
Figure 4.

Broad Inflation and Its 10-Year Forecasts via Yield Spread and FRBC

Figure 5.
Figure 5.

Time Plot of Broad & Medical CPI Inflation Rates, Years 1948-2020.

Figure 6.
Figure 6.

Time Plot of the Medical Inflation Gap, Years 1948-2020.

Figure 7.
Figure 7.

Time Plot of Moving Averages for the Medical Inflation Gap.

Figure 8.
Figure 8.

MC and 2-Step Forecasts (10, 20, 30 year GAP averaging), Years 1992-2020.

Figure 9.
Figure 9.

MC and 1-Step Forecasts (10, 20, 30 year MC averaging), Years 1992-2020.

Contributor Notes

* Scott D. Gilbert, Associate Professor of Economics, Southern Illinois University Carbondale, IL; Gene A. Trevino, Economic Evidence, San Antonio, TX. The authors want to thank the Editor and anonymous referees for suggestions that greatly improved this work.