INFLATION WATCH - November, 2014

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 low. The drop in oil and gas prices had a significant effect on inflation measures. The CPI-U—the popular measure of inflation, sometimes called headline inflation—fell 0.3 percent in November vs. October 2014, after seasonal adjustment, and was up only 1.3 percent vs. November 2013, 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 November 2014. Through 2015 most forecasters think headline CPI will be 1.8 percent, plus or minus 0.5 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 prices far outpaced both headline inflation and the overall price index for medical care. In 2013 for a few months this appeared to change, but the slowdowns (or drops) reversed course, and these prices are again rising significantly faster than the overall CPI. On a year-over-year basis, in November 2014 prices for inpatient hospital care rose by 5.4 percent. Slightly more favorable changes characterize seasonally adjusted prices for outpatient hospital services, which rose by 4.2 percent in November 2014 over November 2013. Price changes for prescription drugs were low but have been rising lately. The latest year-over-year rise for prescription drug prices was 4.6 percent (most of that in the last seven months).

Prices for some items that drive property (and property damage liability) claims severity are volatile commodities. For example, after surging in 2011, producer prices for nonresidential construction rose by 1.7 percent in 2012, by 0.6 percent in 2013, and were unchanged for the 12-month period that ended in November 2014. Prices for residential construction followed a similar pattern: up 5.9 percent in 2011, 2.5 percent in 2012, 1.7 percent in 2013, and 1.2 percent in the last 12 months.

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 0.2 percent in November 2014 vs. October 2014, and fell by 0.7 percent compared with November 2013. In fact these prices have fallen in every single month since December 2012 and are now 3.1 percent lower than at year-end 2012.  However, from 2006 through 2012 annual prices for motor vehicle parts and equipment rose faster than the overall CPI; the most recent period is not unprecedented (parts and equipment prices fell or rose less than the annual CPI every year from 1990 through 2000) but it cannot be assumed to continue indefinitely. Prices for motor vehicle repair­­­­­ rose by 1.8  percent for the 12 months ended November 2014; prices for motor vehicle body work rose by 1.9 percent year-over-year (not seasonally adjusted). The BLS survey of consumer prices for motor vehicle insurance in November 2014 rose by 4.8 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 faster 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 2.47 percent in November 2014 on a year-over-year basis—a full percentage point higher than headline inflation. This affects workers comp and, indirectly, liability and PIP claims. This is the fourth month in a row that wages rose faster than the CPI. Although this implies that the labor market is tightening, other data—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.