By Steven Weisbart, Chief Economist
The Insurance Information Institute (I.I.I.) Inflation Watch spreadsheet contains the latest consumer price data from the U.S. Department of Labor Bureau of Labor Statistics (BLS). The CPI-U—the popular measure of consumer prices, sometimes called headline inflation—rose by 2.5 percent in April 2018 vs. April 2017, which is the largest 12-month increase since the period ending March 2017, and higher than the 1.6-percent average annual rate over the past 10 years. The core CPI—the overall index minus the effects of price changes for food and energy—rose 2.1 percent for the 12 months ending April 2018—the same as the March year-over-year core, and its largest increase since the period ending February 2017. (Most economists prefer to use the core, not the headline, inflation measure to avoid the “noise” of volatile prices for those items.) The core PCE deflator—the inflation measure that the Federal Reserve prefers—rose by 1.9 percent on a year-over-year basis in March 2018 (the latest available reading). Many forecasters project headline CPI for 2018 to range between 2.1 and 2.7 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), med pay and obviously, medical expense insurance. For many years these price increases have outpaced headline inflation, and this is still true today. In April 2018, seasonally adjusted on a year-over-year basis, prices for inpatient hospital care rose by 4.0 percent. Seasonally adjusted prices for outpatient hospital services also rose by 4.0 percent in April 2018 over March 2017. Price increases for prescription drugs have been moderate lately, rising by 2.7 percent in April 2018 over April 2017—slightly above the core CPI and the core PCE deflator.
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 0.7 percent in April 2018 vs. April 2017. Parts and equipment prices have been flat or falling consistently since 2013 and are now about the level reached in May 2011. Prices for motor vehicle repair rose by just 0.1 percent for the 12 months ended April 2018. Prices for motor vehicle bodywork rose by 2.4 percent year-over-year (not seasonally adjusted). The BLS survey of consumer prices for motor vehicle insurance in April 2018 rose by 9.0 percent year-over-year. Of course, many factors other than prices for auto repair—such as the continuing drop in insurers’ investment income, 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)—likely are affecting these increases.
The Census Bureau computes a price index for new single-family houses under construction. The latest data (for March 2018) shows a 2.6 percent increase over the index in March 2017. However, the National Association of Home Builders, which tracks the price of framing lumber, reported that in April, their index climbed from $400 to $500 and as of May 11 was at $543, an all-time high.
Media stories about inflation are partly traced to belief that, since the economy is nearing (or at?) full employment, employers will have to hike wages further in order to attract needed workers, and that wage increases will morph into consumer price increases. And wages have been rising. The Bureau of Labor Statistics reported that on a year-over-year basis, average weekly earnings of private sector employees grew by 2.9 percent in April 2018 over the prior April, but these economy-wide numbers obscure variations in particular industries. For example, average weekly earnings in April 2018 vs. April 2017 rose by 4.1 percent in the construction industry, but only by 2.4 percent in manufacturing. On the services side, average weekly earnings rose by 4.6 percent in the financial activities industry, but only 2.6 percent in the education and health services industry. Wage growth affects workers compensation and indirectly, liability and PIP claims. Wage growth above inflation means consumers have increased buying power, which could lead to stronger economic growth near-term.
One additional price bears watching: the price of money (interest rates). The Federal Reserve’s Open Market Committee is likely to continue through 2018 to raise the short-term “fed funds” rate, which often drives interest rates for longer-term loans. Long-term interest rates will likely also rise because of substantial additional borrowing by the federal government, both because of the recently-enacted federal income tax changes and the subsequent budget agreement. But even before the tax act and budget agreement, interest rates were rising. The yield on 10-year U.S. Treasury notes in April 2018 was 2.86 percent, up from 2.43 percent a year earlier. Higher long-term interest rates can be expected to have a dampening effect on economic growth, but this could be offset by the short-term enhancing effects of more money in consumer and business pockets from the income tax cuts. Higher interest rates will help P/C insurer investment income, but could weigh on the capital gains element of investment gains (as the prices of currently-held low-yielding bonds fall).