CPI Funny Business

On today’s show we are taking a look at the inflation index that is being used to determine interest rate policy. We live in a strange time right now where the Fed considers economic growth to be against their objective of taming inflation.

What’s normally good is bad, and what is bad is good.

The largest component of the Core CPI metric that the Federal Reserve uses to measure inflation is housing. It accounts for 40% of the Core CPI metric. On tomorrow’s show we are going to look deeper into the housing component of the Core CPI metric.

On today’s show we are going to look at the healthcare component which makes up 11% of the Core CPI metric.

We are used to getting newly updated inflation metrics from the bureau of labor and statistics every month for the previous month. But the healthcare numbers are only updated one a year. This happens every year in October. For the rest of the year, the healthcare component of CPI remains unchanged for reasons that I will explain in the next couple of minutes.

Now Healthcare makes up about 19.7% of the economy in the US. But somehow it is only reflected as 11 of the core CPI or a little over 8% of the full consumer price index. Part of the reason for that is that healthcare costs have tended to increase faster than many other segments of the economy. For that reason, there is a widely held belief that the weighting in the CPI is reduced in order to reduce the impact of those cost increases in the inflation metrics.

But healthcare is difficult to measure. Many people don’t access healthcare in the same way that they might buy milk at the grocery store.

There is a major insurance component in any healthcare discussion. But an insurance premium is not the true cost of health care. Each year, insurance premiums go up according to a prescribed formula. This is where insurance companies get their revenue and the only way to gauge the costs is to subtract the costs paid by the insurance companies and look at the retained earnings at the end of the year. This sounds convoluted, and it is. They are measuring the profit earned by insurance companies as a proxy for health care costs.

https://www.bls.gov/cpi/factsheets/medical-care.htm

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Host: Victor Menasce

email: podcast@victorjm.com