INFLATION WATCH - March, 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 March 2015 vs. February 2015, after seasonal adjustment, and declined by 0.1 percent vs. February 2014, before seasonal adjustment. However, core inflation—the overall index minus the effects of price changes for food and energy—rose 1.8 percent for the 12 months ending March 2015. Through 2015 most forecasters think headline CPI will be 0.2 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, 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 in 2015, but at a lower level than during 2014. On a year-over-year basis, in March 2015 prices for inpatient hospital care rose by 3.1 percent. This is the lowest year-over-year increase in inpatient hospital prices in more than 16 years (since August 1998). Also, seasonally adjusted prices for outpatient hospital services rose by 3.5 percent in March 2015 over March 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 2014, (up 0.2 percent) January 2015 (down 0.2 percent), and March 2015 (up 0.3 percent). The latest year-over-year seasonally-adjusted rise for prescription drug prices was 5.7 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, fell by 0.4 percent in March 2015 vs. February 2015, but were unchanged vs. March 2014. These prices fell in most months since December 2012 and, despite some monthly increases, are still lower than in June 2011. Prices for motor vehicle repair rose by 2.4 percent for the 12 months ended March 2015; prices for motor vehicle body work rose by 0.5 percent year-over-year (not seasonally adjusted). The BLS survey of consumer prices for motor vehicle insurance in March 2015 rose by 5.9 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, as noted above—likely are affecting these increases.

Finally, employment data for March 2015 were considerably weaker than in recent prior months. Average weekly earnings of all employees in private employment rose 2.1 percent in March 2015 on a year-over-year basis—0.3 percentage points higher than core inflation. Although this is the eighth month in a row that wages rose slightly faster than the core CPI, it is the smallest wage margin over core CPI in quite some time. Wage growth affects workers comp and, indirectly, liability and PIP claims. Other data—unfilled job openings, the seven million people who are working part-time but want full-time employment, the three-quarters of 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 (and falling) “headline unemployment” rate. The labor market slack is generally believed to restrain higher inflation, at least in the coming months.