INFLATION WATCH - February, 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 0.2 percent in February 2015 vs. January 2015, after seasonal adjustment, and was unchanged vs. February 2014, before seasonal adjustment. However, core inflation—the overall index minus the effects of price changes for food and energy—rose 1.7 percent for the 12 months ending February 2015. Through 2015 most forecasters think headline CPI will be 0.3 percent, plus or minus 0.7 percent. There is still slack in both the U.S. and especially the larger global economies, making sharp near-term overall future price increases unlikely (except from exogenous shocks, such as the price of oil). However, as noted below, sharp price increases for particular categories of items are not only possible, but are occurring.

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 comp and bodily injury liability lines, 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 trend is continuing, but at a lower level than during 2014. On a year-over-year basis, in February 2015 prices for inpatient hospital care rose by 3.4 percent. This is the lowest year-over-year increase in inpatient hospital prices in 16 years (since April 1999). Also, seasonally adjusted prices for outpatient hospital services rose by 3.5 percent in February 2015 over February 2014; except for September 2014, when the year-over-year increase was 3.3 percent, this is the lowest year-over-year increase in these prices since June 1998. On the other hand, price changes for prescription drugs were low in 2013 and the first half of 2014 (averaging about 1 percent on a year-over-year basis in 2013 and 2 percent in the first half of 2014) but have been rising lately. Since May 2014 each month seasonally adjusted prices for prescription drugs rose at least 0.6 percent, except for August (up 0.2 percent) and January 2015 (down 0.2 percent). The latest year-over-year seasonally adjusted rise for prescription drug prices was 5.2 percent.

Price increases relating to auto insurance 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 0.2 percent in February 2015 vs. January 2015, but were unchanged vs. February 2014. These prices fell in most months since December 2012 and, despite the last three month increases, are still lower than in August 2011. Prices for motor vehicle repair rose by 2.3 percent for the 12 months ended February 2015; prices for motor vehicle body work rose by 0.6 percent year-over-year (not seasonally adjusted). The BLS survey of consumer prices for motor vehicle insurance in December 2014 rose by 5.6 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 production and nonsupervisory employees in private employment rose 2.6 percent in February 2015 on a year-over-year basis—0.9 percentage points higher than core inflation. This affects workers comp and, indirectly, liability and PIP claims. This is the seventh month in a row that wages rose slightly faster than the CPI. Although this implies that the labor market is tightening, other data—unfilled job openings, the seven million people who are working part-time but want full-time employment, etc.—tell a somewhat different story. This is data that will bear watching in the coming months.