Inflation Watch - December 2017

By Steven Weisbart, Chief Economist

The Insurance Information Institute (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 2.1 percent in December 2017 vs. December 2016, before seasonal adjustment. Core inflation—the overall index minus the effects of price changes for food and energy—rose 1.8 percent for the 12 months ending October 2017. (Most economists prefer a year-over-year time frame and the core—not the “headline”–inflation measure.) The BLS year-over-year core CPI rate has been 1.8 percent or 1.7 percent since May 2017. The core year-over-year Personal Consumption Expenditure (PCE) deflator—the Federal Reserve Board’s preferred inflation measure—has ranged from 1.3 percent to 1.9 percent since the end of the Great Recession (for two months at the start of 2012, it reached 2.1 percent), And as of November 2017 (the latest data available at this writing), was 1.6 percent. By most measures the U.S. economy is still growing, but capacity constraints might increase the likelihood of near-term price increases. From a macroeconomic policy viewpoint, 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 2018 to range between 1.5 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 both headline inflation and the overall price index for medical care, and this is still true today. In December 2017, seasonally adjusted on a year-over-year basis, prices for inpatient hospital care rose by 4.2 percent. Seasonally adjusted prices for outpatient hospital services rose by 4.8 percent in December 2017 over December 2016. Price changes for prescription drugs have been moderate lately, rising by 2.8 percent in December 2017 over December 2016—barely ahead of general inflation.

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 December 2017 vs. December 2016. Current prices for motor vehicle parts and equipment are about even with prices in April 2011. Prices for motor vehicle repair rose by just 0.9 percent for the 12 months ended December 2017. Prices for motor vehicle body work rose by 1.9 percent year-over-year (not seasonally adjusted). The BLS survey of consumer prices for motor vehicle insurance in December 2017 rose by 7.9 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, 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.

Some prices relating to property insurance claims have varied recently. For example, the Census Bureau computes a price index for new single-family houses under construction. The latest data for November 2017 show a 2.9 percent increase over the index in November 2016, but the year-over-year changes were 4.1 percent as of September 2017, and 3.7 percent as of October 2017.

Wages are growing, but barely faster than inflation. The Bureau of Labor Statistics reported that on a year-over-year basis, average weekly earnings grew by 2.8 percent in December 2017 over the prior December, and average hourly earnings grew by 2.5 percent, but these economy-wide numbers obscure significant variations in particular industries. For example, average weekly earnings in December 2017 vs. December 2016 rose by 4.0 percent in the construction industry and by 5.2 percent in the mining/drilling/logging industries, but by only 1.5 percent in manufacturing. Likewise, they rose by 4.4 percent in the Leisure/Hospitality industry, by 3.3 percent in the Information industry, but only 0.2 percent in the Utilities 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. However, the economy appears to be approaching full employment, as indicated by the lowest unemployment rate in the last 17 years. There might still be some slack in the labor market, but it is hard to gauge how much. For example, BLS reports that there are 4.9 million people who are working part-time but want full-time employment. However, even in the most recent prosperous times (such as the late Clinton administration), this number was never lower than about 3 million. Likewise, the 474,000 people who say they are “discouraged” from even looking for a job: in the last 20 years, this number was never lower than about 200,000. So we are probably getting close to a labor market in which demand will outstrip supply, leading to pay raises that will get passed along in the form of higher prices.