Inflation watch - November, 2016

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 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 1.7 percent in November 2016 vs. November 2015, before seasonal adjustment. Core inflation—the overall index minus the effects of price changes for food and energy—rose 2.1 percent for the 12 months ending November 2016. (Most economists prefer a year-over-year time frame and the core—not the “headline”–inflation measure.) The BLS year-over-year core inflation rate has remained in a range of 2.1 percent to 2.3 percent for a full year (since December 2015). 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 October 2016, was 1.7 percent (the latest value). 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 does not appear to be a current or near-future problem to combat, but gradually rising inflation is possible and is being watched by the Federal Reserve Board’s Open Market Committee, among others. Many forecasters project headline CPI for 2017 to move higher, ranging between 2.0 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) 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 that has moderated recently. Seasonally adjusted on a year-over-year basis, prices for inpatient hospital care rose by 4.8 percent in November 2016. Seasonally adjusted prices for outpatient hospital services rose by 3.2 percent in November 2016 over November 2015. Price changes for prescription drugs have been rising strongly, on a month-over-month basis, in 2016, up 6.7 percent in October over December 2015. They dropped in November 2016 (vs. October), producing a year-over-year rise for November 2016 of 6.0 percent.

Price increases relating to auto insurance property claims also 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 1.5 percent in November 2016 vs. November 2015. These prices fell in most months since August 2012 and, despite some monthly increases, are about even with prices in April 2011. Falling prices for motor vehicle parts and equipment are welcome, but they should be put into context: between August 2000 and February 2012 these prices rose virtually every month, for a cumulative gain of 46.7 percent (a compound annual growth rate of about 3.3 percent). Prices for motor vehicle repair rose by 2.4 percent for the 12 months ended November 2016, 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 3.4 percent year-over-year (not seasonally adjusted), due to consecutive month-over-month increases of 1.0 percent each. The BLS survey of consumer prices for motor vehicle insurance in November 2016 rose by 6.7 percent year-over-year; this is partly attributable to a 1.2 percent increase in April 2016 over March 2016 and another 1.0 percent increase in November over October 2016. The April-over-March increase is the largest one-month increase since July 2013 and only the second time since April 2003 that we’ve seen an increase of that size. 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)—likely are affecting these increases.

Also, there are some signs that wages are growing slightly faster than inflation. The Bureau of Labor Statistics reported that, on a year-over-year basis, average weekly earnings grew by 2.16 percent in November and average hourly earnings grew by 2.45 percent. 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. 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 slack in the labor market, as evidenced by the 5.67 million people who are working part-time but want full-time employment, the 591,000 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.