Inflation watch - March, 2016

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 quite low. The CPI-U—the popular measure of inflation, sometimes called headline inflation—rose by 0.9 percent in March 2016 vs. March 2015, before seasonal adjustment. However, core inflation—the overall index minus the effects of price changes for food and energy—rose 2.2 percent for the 12 months ending March 2016. The BLS year-over-year core inflation rate has been trending up since May 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 February 2016, was 1.7 percent. There is still some 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 doesn’t appear to be a current or near-future problem to combat. Most forecasters project headline CPI for the full year 2016 to range between 1.0 and 1.6 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 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. This pattern continued in 2016 for inpatient hospital services, but not for outpatient services. Seasonally adjusted on a year-over-year basis, in March 2016 prices for inpatient hospital care rose by 5.3 percent. Seasonally-adjusted prices for outpatient hospital services rose by 2.5 percent in March 2016 over March 2015. This is the lowest year-over-year increase in prices for outpatient hospital services in at least 28 years. Moreover, the year-over-year price index for outpatient hospital services is likely to fall again next month because the price level in April 2015 was sharply higher than in March 2015, so the base for the year-over-year calculation will be considerably higher than previously. Price changes for prescription drugs have been moderating; in March 2016 prices for prescription drugs rose by 3.6 percent over March 2015.

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, fell by 0.2 percent in March 2016 vs. March 2015. These prices fell in most months since August 2012 and, despite some monthly increases, are about even with prices in June 2011. Falling prices for motor vehicle parts and equipment are welcome of course, but they should be put into context: between August 2000 and August 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 March 2016, thanks primarily to a one-month jump of 0.6 percent in March 2016 over February 2016; prices for motor vehicle body work rose by 2.4 percent year-over-year (not seasonally adjusted). March was the second straight month of 0.4 percent monthly increases in the prices of motor vehicle body work; if this trend continues it could be a significant hit on auto repair claims. The BLS survey of consumer prices for motor vehicle insurance in March 2016 rose by 5.1 percent year-over-year; this is partly attributable to a 1.0 percent increase in November over October 2015—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, as noted above—likely are affecting these increases.

Finally, average weekly earnings of all employees in private employment rose 1.95 percent in March 2016 on a year-over-year basis—about one-third of a percentage point slower than the rise in the core CPI. Wage growth affects workers comp and, indirectly, liability and PIP claims. Wage growth below inflation means consumers have diminished buying power, which could lead to weaker economic growth near term. This is the second month in a row that wage growth hasn’t kept up with (and previously actually slightly exceeded) the core measure of inflation. Moreover, other data—the 6.1 million people who are working part-time but want full-time employment, the 585,000 people who say they are “discouraged” from even looking for a job, etc.—tell a similar story of slack remaining in the labor market despite the low “headline” unemployment rate. The labor market slack is generally believed to generally restrain higher inflation, at least in the coming months.