Inflation watch - January, 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 quite low. The CPI-U—the popular measure of inflation, sometimes called headline inflation—rose by 1.4 percent in January 2016 vs. January 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 January 2016 (tied with the largest 12-month increase since the year ending June 2012). 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 December 2015, was 1.4 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, rising inflation doesn’t appear to be a current or near-future problem to combat. Most forecasts project headline CPI for the full year 2016 to range between 0.7 and 1.7 percent.

The U.S. economy consists of roughly 80 percent services and 20 percent goods. As of the third quarter of 2015, year-over-year prices for goods fell by 2.2 percent, while prices for services rose by 1.9 percent. Services prices have been fairly stable, but goods prices generally have been 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 comp 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, although the gap was smaller. Seasonally adjusted on a year-over-year basis, in January 2016 prices for inpatient hospital care rose by 4.8 percent. Seasonally-adjusted prices for outpatient hospital services rose by 3.4 percent in January 2016 over January 2015. Price changes for prescription drugs have been moderating; in January 2016 prices for prescription drugs rose by 3.0 percent over January 2015.

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 0.1 percent in January 2016 vs. January 2015. These prices fell in most months since August 2012 and, despite some monthly increases, are about even with prices in June 2011. Prices for motor vehicle repair rose by 1.9 percent for the 12 months ended January 2016; prices for motor vehicle body work rose by 1.4 percent year-over-year (not seasonally adjusted). The BLS survey of consumer prices for motor vehicle insurance in January 2016 rose by 5.4 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 2.54 percent in January 2016 on a year-over-year basis—about one-third of a percentage point ahead the rise in the core CPI. Wage growth affects workers comp 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, other data—unfilled job openings, the 6 million people who are working part-time but want full-time employment, the 623,000 people who say they are “discouraged” from even looking for a job, etc.—tell a somewhat different story of 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.