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 1.6 percent in January 2019 vs. January 2018. The core CPI—the overall index minus the effects of price changes for food and energy—rose 2.2 percent for the 12 months ending January 2019—the fifth month in a row in which the 12-month increase was either 2.1 percent or 2.2 percent. 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 1.8 percent on a year-over-year basis in November 2018 (the latest available reading); this is the ninth month in a row in which the core PCE deflator was between 1.8 percent and 2.0 percent. Many forecasters project headline CPI for 2019 to range between 1.4 and 2.5 percent. However, 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 far outpaced headline and core inflation, but the gap has nearly disappeared. In January 2019, seasonally adjusted on a year-over-year basis, prices for inpatient hospital care rose by 1.4 percent. This is the lowest year-over-year increase in inpatient hospital prices in more than 20 years. Price increases for outpatient hospital care rose by 2.4 percent in January 2019. This is the lowest year-over-year price increase for outpatient hospital services in two and a half year (since May 2016, when it was 1.1 percent). Price increases for prescription drugs on a year-over-year basis as of January 2019 fell by 0.5 percent. This is quite rare: in the last 30 years, it happened only twice before (in December 2018 and July 2012).
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, rose by 2.1 percent as of January 2019 vs. January 2018. Some this rise might have been caused by the tariffs that the U.S. has placed on imported parts; other explanations might be that more sophisticated parts needed for new cars are more expensive due to advanced technology. Nonetheless, auto claims seem likely to be affected. Prices for motor vehicle repair rose by 0.8 percent for the 12 months ended January 2019. Prices for motor vehicle body work rose by 2.5 percent year-over-year (not seasonally adjusted). The BLS survey of consumer prices for motor vehicle insurance in January 2019 rose by 3.4 percent year-over-year. This is the lowest year-over-year increase in motor vehicle insurance prices in more than six years (July 2012). Of course, factors other than prices for auto repair—such as the continued low level of insurers’ investment income and the cost of medical care—likely are affecting these prices.
The Census Bureau computes a price index for new single-family houses under construction. The latest data (for December 2018) show a 2.9 percent increase over the index in December 2017. However, the producer price index for inputs to construction rose in January 2019 by 1.7 percent over the index a year earlier. Moreover, it is easy to forecast that the prices of materials and labor to rebuild the homes, businesses and other structures destroyed by the California wildfires will rise due to the sharp increase in demand that will occur as soon as it is safe to begin rebuilding.
Media stories about inflation are partly traced to belief that since the unemployment rate for January was 4.0 percent, the economy is believed to be close to full employment, so employers will have to hike wages further to attract needed workers, and that these wage increases will morph into consumer price increases. And overall, wages have been rising above the rate of inflation, however it is measured. The Bureau of Labor Statistics reported that, on a year-over-year basis, average weekly earnings of private sector employees grew by 3.5 percent in January 2019 over the prior January. However, these economy-wide numbers obscure variations in particular industries. For example, average weekly earnings in January 2019 vs. January 2018 rose by 4.9 percent in the construction industry but by 1.4 percent in manufacturing. On the services side, average weekly earnings rose by 4.0 percent in the financial activities industry and by 7.6 percent in the information industry, but by only 3.1 percent in the education and health services industry. Wage growth affects workers compensation and, indirectly, liability and PIP claims. On the plus side, wage growth above inflation means consumers have increased buying power, which could lead to continued economic growth near-term. Similarly, retirees have more purchasing power: Social Security checks went up by 2.8 percent in January 2019.
One additional price bears watching: the price of money (interest rates). The Federal Reserve’s Open Market Committee has been raising the short-term “fed funds” rate, which affects mainly short-term interest rates, but long-term interest rates will likely have greater effects on the economy. The average monthly yield on 10-year U.S. Treasury notes in February 2019 was 2.68 percent, down from 2.84 percent a year earlier. Forecasters project yields on 10-year U.S. Treasury notes for 2019 to range between 2.3 and 3.4 percent. If so, higher long-term interest rates can be expected to have a dampening effect on economic growth. Higher interest rates would also 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).