Inflation watch - March 2017

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 2.4 percent in March 2017 vs. March 2016, before seasonal adjustment. Core inflation—the overall index minus the effects of price changes for food and energy—rose 2.0 percent for the 12 months ending March 2017. The BLS year-over-year core inflation rate has been essentially flat since January 2016. 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 March 2017, was 1.6 percent. By some measures there still appears to be a little 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, 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 2017 to range between 2.3 and 2.8 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) 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, but that has been moderating lately. Seasonally adjusted on a year-over-year basis, in March 2017 prices for inpatient hospital care rose by 4.1 percent. Seasonally adjusted prices for outpatient hospital services rose by 4.8 percent in March 2017 over March 2016. Price changes for prescription drugs have been rising also; March 2017 saw a 4.7 percent year-over-year rise.

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, dropped by 0.3 percent in March 2017 vs. March 2016. These prices fell in most months since August 2012, although oddly the December 2016 change from November 2016 was +0.6 percent—the largest one-month rise in five years. Current prices for motor vehicle parts and equipment are about even with prices in May 2011. Prices for motor vehicle repair rose by 2.1 percent for the 12 months ended March 2017, thanks primarily to a one-month jump of 0.7 percent in November 2016 over October 2016. Prices for motor vehicle body work rose by 2.7 percent year-over-year (not seasonally adjusted). The BLS survey of consumer prices for motor vehicle insurance in March 2017 rose by 8.1 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 price increases relating to property insurance claims have spiked recently. Prices for framing lumber rose by about 15 percent in the first quarter of 2017 over the comparable period in 2016. The Census Bureau computes a price index for new single-family houses under construction; the latest data is for March 2017, showing a 7.0 percent increase over the index in March 2016.

Also, there are some signs that wages are growing barely faster than inflation. The Bureau of Labor Statistics reported that, on a year-over-year basis, average weekly earnings grew by 2.4 percent in March 2017 over the prior March, and average hourly earnings grew by 2.7 percent. 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. As the economy approaches full employment, wage gains over inflation are expected to widen. There is still a little slack in the labor market, but it’s hard to gauge how much. For example, BLS reports that there are 5.5 million people who are working part-time but want full-time employment, but even in the most recent prosperous times (such as the late Clinton administration), this number was never lower than about 3 million. Likewise, the 460,000 people who say they are “discouraged” from even looking for a job; in the late Clinton administration this was never lower than about 200,000. So we’re probably getting close to a labor market in which demand will outstrip supply, leading to above-inflation raises that will get passed along in the form of higher prices.