Inflation watch - January 2017

The Insurance Information Institute (I.I.I.) Inflation Watch spreadsheet contains the latest data from the U.S. Department of Labor’s Bureau of Labor Statistics (BLS). Both current and expected near-term general inflation continue to be low by historical standards, but there are pockets of rising inflation. The CPI-U—the popular measure of inflation, sometimes called headline inflation—rose by 2.5 percent in January 2017 vs. January 2016, before seasonal adjustment. Core inflation—the overall index minus the effects of price changes for food and energy—rose 2.3 percent for the 12 months ending January 2017. The BLS year-over-year core inflation rate has been essentially flat since January 2016. The core year-over-year Personal Consumption Expenditure (PCE) deflator—the Federal Reserve Bank’s preferred inflation measure—has ranged from 1.3 percent to 1.9 percent since the end of the Great Recession and, as of December 2016, was 1.7 percent (the latest value). By some measures there still appears to be a little slack in both the U.S. and especially the larger global economies, making sharp near-term overall future price increases unlikely. From a macroeconomic policy viewpoint, sharply rising inflation doesn’t appear to be a current or near-future problem to combat, but gradually rising inflation seems likely and is being watched by the Federal Reserve Board’s Open Market Committee, among others. Many forecasters project headline CPI for 2017 to range between 2.1 and 2.9 percent.

Price trends for items that more directly affect property/casualty (P/C) insurance claims do not necessarily follow broad-based price indexes. Prices for items such as intensive healthcare affect claims under third-party coverages such as workers compensation and bodily injury liability, as well as first-party coverages like Personal Injury Protection (PIP) and med pay and, obviously, medical expense insurance. For many years these price increases have far outpaced both headline inflation and the overall price index for medical care, but this is not currently the case. These price increases still outpace general inflation, but not by as much as previously. Seasonally adjusted on a year-over-year basis, in January 2017 prices for inpatient hospital care rose by 4.6 percent. Seasonally adjusted prices for outpatient hospital services rose by 3.4 percent in January 2017 over January 2016. This could constitute a “new normal” for these services: since August 2014, the year-over-year rise in outpatient hospital prices was below 4 percent in 22 of the 30 months. On the other hand, price changes for prescription drugs have been rising strongly; January 2017 saw a 6.1 percent year-over-year rise.

Price increases relating to auto insurance property claims have been quite moderate recently. Prices for motor vehicle parts and equipment, which affect not only comprehensive and collision claims, but property damage liability as well, dropped by 1.2 percent in January 2017 vs. January 2016. These prices fell in most months since August 2012. Current prices for motor vehicle parts and equipment are about even with prices in April/May 2011. Prices for motor vehicle repair rose by 2.4 percent for the 12 months ended January 2017, thanks primarily to a one-month jump of 0.7 percent in November 2016 over October 2016. Prices for motor vehicle body work rose by 3.0 percent year-over-year (not seasonally adjusted). The BLS survey of consumer prices for motor vehicle insurance in January 2017 rose by 7.5 percent year-over-year; this is partly attributable to one-month increases of 0.8 percent or greater in four of the last ten months. Of course, many factors other than prices for auto repair—such as the continuing drop in insurers’ investment income, and continuing above-CPI growth in the prices for intensive medical care, and an unusual upturn in the collision rate, which is related to the increase in the number of people employed (and adding cars to rush hour), and increasingly expensive types of repairs to electronic-laden cars—likely are affecting these increases.

The latest data on wages show little sign of upward pressure on prices. The Bureau of Labor Statistics earlier reported that, on a year-over-year basis, average weekly earnings grew by 1.9 percent in January 2017 vs. January 2016, and average hourly earnings grew by 2.5 percent. Wage growth affects workers comp and, indirectly, liability and personal injury protection claims. Wage growth above inflation means consumers have increased buying power, which could lead to stronger economic growth near term. As the economy approaches full employment, wage gains over inflation are expected to widen, but that might take some time to develop. There is still some slack in the labor market, as evidenced by the 5.84 million people who are working part-time but want full-time employment, the 532,000 people who say they are “discouraged” from even looking for a job, and others who are not in the labor force but could join if job conditions tighten, etc. The labor market slack is generally believed to restrain higher inflation, at least in the coming months.