INFLATION WATCH - NOVEMBER, 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 by 0.5 percent in November 2015 vs. November 2014, before seasonal adjustment. However, core inflation—the overall index minus the effects of price changes for food and energy—rose 2.0 percent for the 12 months ending November 2015 (by 0.1 percent, the largest 12-month increase since the year ending May 2014). The BLS year-over-year core inflation rate has been trending up (but very slightly) 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 the third quarter of 2015, was 1.3 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. From a macroeconomic policy viewpoint, rising inflation does not appear to be a current or near-future problem to combat. Most forecasters think headline CPI for the full year 2016 will range between 1.3 and 2.1 percent.

As most people know, the U.S. economy consists of roughly 80 percent services and 20 percent goods. As of the third quarter 2015, year-over-year prices for goods rose by 3.9 percent, while prices for services rose by 2.8 percent. Services prices have been fairly stable, but goods prices have been generally 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 2015, although the gap was smaller. Seasonally adjusted on a year-over-year basis, in November 2015 prices for inpatient hospital care rose by 4.7 percent. Seasonally-adjusted prices for outpatient hospital services rose by 3.9 percent in November 2015 over November 2014. Price changes for prescription drugs have been moderating; in November 2015 prices for prescription drugs rose by 3.4 percent over November 2014.

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 November 2015 vs. November 2014. These prices fell in most months since August 2012, and despite some monthly increases, are about even with prices in May 2011. Prices for motor vehicle repair rose by 2.0 percent for the 12 months ended November 2015; prices for motor vehicle body work rose by 1.7 percent year-over-year (not seasonally adjusted). The BLS survey of consumer prices for motor vehicle insurance in November 2015 rose by 5.5 percent year-over-year. This is partly attributable to a 1.1 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 have 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 2.0 percent in November 2015 on a year-over-year basis—just matching the rise in the core CPI. Wage growth affects workers compensation and, indirectly, liability and PIP claims. Wage growth matching inflation means consumers do not have increased buying power, which helps explain why the economy’s growth continues to be moderate. However, other data—unfilled job openings, the six million people who are working part-time but want full-time employment, the 595,000 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 “headline unemployment” rate. The labor market slack is generally believed to restrain higher inflation, at least in the coming months.