INFLATION WATCH: JUNE, 2015

The 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 quite low. The CPI-U—the popular measure of inflation, sometimes called headline inflation—rose 0.3 percent in June 2015 vs. May 2015, after seasonal adjustment, and rose 0.1 percent vs. June 2014, before seasonal adjustment. However, core inflation—the overall index minus the effects of price changes for food and energy—rose 1.8 percent for the 12 months ending June 2015. Since January the 12-month change in the CPI has been close to zero, and most forecasters think headline CPI for the full year 2015 will end up at 0.2 percent, plus or minus 0.3 percent. There is still slack in both the United States and especially the larger global economies, making sharp near-term overall future price increases unlikely (except from exogenous shocks, such as the price of oil). Moreover, some economists have begun asking whether we are correctly measuring inflation--especially wage inflation.

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 comp and bodily injury liability, as well as first-party coverages like 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; this trend is continuing in 2015. On a year-over-year basis, in June 2015 prices for inpatient hospital care rose by 3.0 percent, the lowest year-over-year change since December 1998 (sixteen and a half years ago). Seasonally adjusted prices for outpatient hospital services rose by 3.9 percent in June 2015 over June 2014. Although this is down nicely from the April and May readings (5.0 and 5.3 percent, respectively), unlike with inpatient prices, it is not the lowest year-over-year reading in a long time. The most recent lower reading was in March 2015 (a 3.5 percent rise from the year-earlier month). In contrast to hospital price changes, price changes for prescription drugs have been rising lately. Since May 2014 each month seasonally-adjusted prices for prescription drugs rose at least 0.3 percent, except for August 2014, (up 0.2 percent) January 2015 (down 0.2 percent). The latest year-over-year seasonally-adjusted rise for prescription drug prices was 4.8 percent.

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, fell by 0.5 percent in June 2015 vs. June 2014. These prices fell in most months since December 2012 and despite some monthly increases, are still lower than in June 2011. Prices for motor vehicle repair rose by 2.3 percent for the 12 months ended June 2015, and prices for motor vehicle body work rose by 0.5 percent year-over-year (not seasonally adjusted). The BLS survey of consumer prices for motor vehicle insurance in June 2015 rose by 5.1 percent year-over-year. 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, as noted above—likely are affecting these increases.

Finally, average weekly earnings of all employees in private employment rose 2.0 percent in June 2015 on a year-over-year basis—just a bit above the rise in the core CPI. This is the eleventh month in a row that wages rose faster than the core CPI. Moreover, wages in the services sector (as distinct from the good-producing sector) rose faster than overall wages, and services constitute roughly 80 percent of the U.S. economy. Wage growth affects workers comp and, indirectly, liability and PIP claims. Wage growth above inflation means consumers have increased buying power, which—if used—could stimulate the economy to grow faster than it did in prior years. However, other data—unfilled job openings, the seven million people who are working part-time but want full-time employment, the 650,000 people who say they are “discouraged” from even looking for a job, etc.—tell a somewhat different story of considerable slack remaining in the labor market despite the low (and falling) headline unemployment rate. The labor market slack is generally believed to restrain higher inflation, at least in the coming months.