INFLATION WATCH - October, 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 by 0.2 percent in October 2015 vs. October 2014, before seasonal adjustment. However, core inflation—the overall index minus the effects of price changes for food and energy—rose 1.9 percent for the 12 months ending October 2015 (the same 12-month increase as last month). The BLS year-over-year core inflation rate has remained between 1.6 percent and 1.9 percent for the last year. The core Personal Consumption Expenditure (PCE) deflator—the Federal Reserve Bank’s preferred inflation measure—was also mostly in this range in 2015 and for the last several years. There is still 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, rising inflation does not appear now, and in the near future is not likely to be a problem to combat. Most forecasters think headline CPI for the full year 2016 will range between 1.5 and 2.2 percent.

As most people know, the U.S. economy consists of roughly 80 percent services and 20 percent goods. Lately prices for goods have been nearly flat, while prices for services have been rising at nearly a 3 percent clip. Goods prices have been held back by the global economic slowdown and the plunge in the price of energy, but that headwind has a smaller effect on services prices. Services prices have been fairly stable, but goods prices have been generally volatile.

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 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. Inpatient hospital prices have an odd characteristic that they occasionally leap in a single month, then retreat to smaller incremental changes in following months. For example, such prices rose by 1.6 percent in March 2010 (over February 2010); by 1.9 percent in September 2010; by 1.2 percent in June 2012; by 1.9 percent in August 2013; by 1.8 percent in April 2015; and by 2.3 percent in October 2015. October 2015’s monthly leap marked the first time since 2010 that such a leap occurred twice in a calendar year. On a year-over-year basis  in October 2015 prices for inpatient hospital care rose by 5.2 percent. A similar but smaller leap occurred in October for prices of outpatient hospital services. The one-month rise was 1.7 percent, so that seasonally adjusted prices for outpatient hospital services rose by 4.4 percent in October 2015 over October 2014. In contrast to hospital price changes, price changes for prescription drugs have been moderating; in October 2015 prices for prescription drugs rose by 3.7 percent over October 2014.

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 0.8 percent in October 2015 vs. October 2014. These prices fell in most months since August 2012 and, despite some monthly increases, are about even with prices in May 2011. Prices for motor vehicle repair rose by 1.6 percent for the 12 months ended October 2015; and prices for motor vehicle body work rose by 1.7 percent year-over-year (not seasonally adjusted). The BLS survey of consumer prices for motor vehicle insurance in August 2015 rose by 4.7 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 2.2 percent in October 2015 on a year-over-year basis—0.3 percentage points above the rise in the core CPI. Wage growth affects workers compensation 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 six million people who are working part-time but want full-time employment, the 625,000 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 “headline unemployment” rate. The labor market slack is generally believed to restrain higher inflation, at least in the coming months.