BLS Reports Tame Inflation as Medical Costs Soar Out of Sight

Mish

The BLS says the CPI rose 0.1% in January. Year-Over-Year the CPI is up 2.5%. Your experience is sure to vary.

Once again the BLS tells us inflation is under control. Once again, close inspection suggests something else.

Let's investigate, starting with the BLS Consumer Price Index Report for January 2020.

  • According to the BLS, the Consumer Price Index for All Urban Consumers (CPI-U) rose 0.1 percent in January on a seasonally adjusted basis after rising 0.2 percent in December.
  • The index for shelter accounted for the largest part of the increase in the seasonally adjusted all items index, with the indexes for food and for medical care services also rising. These increases more than offset a decrease in the gasoline index, which fell 1.6 percent in January.
  • The index for all items less food and energy rose 0.2 percent in January after increasing 0.1 percent in December.
  • The all items index increased 2.5 percent for the 12 months ending January, the largest 12-month increase since the period ending October 2018. The index for all items less food and energy rose 2.3 percent over the last 12 months, the same 12-month increase as reported in the previous 3 months. The food index rose 1.8 percent over the last 12 months, while the energy index increased 6.2 percent over that period.

CPI Month-Over-Month and Year-Over-Year

Hooray! Inflation Tame

Hooray, inflation as measured by the BLS is only up 2.3% from a year ago, the same as December.

Month-over-month, the CPI rose only 0.1% vs the expected 0.2%.

But does your basket match this?

CPI Percentage Weights

It's when you dig into details you find disturbing trends, like the lead chart and this.

Medical Care Costs Year-Over-Year

Medical Insurance Quotes

I posted these quotes last month, but it's worth another look after this gloomy report.

I went to NerdWallet for some quotes. My base case was a husband and wife making a combined $100,000, both aged 60, non-smokers, with no dependents.

Same Couple Making $60,000

Synopsis

  • For a couple, aged 60, making $100,000 per year, "affordable" care costs $19,776 right off the top. Then there is a max out of pocket expense of $8,150 per person. Yes, per person.
  • For a couple, aged 60, making $60,000 per year, "affordable" care costs $3,804 right off the top. Then there is a max out of pocket expense of $8,150 per person.

The BLS tells us, medical care is only 6.97% of the "average" household expense.

Average includes all those on medicaid and medicare. It also includes those on company plans.

It does not count corporate costs. Why? The BLS is only concerned with "consumer" prices. No other measures of inflation are important.

Averages take into consideration the average person does not go to the hospital.

Heaven help you if you actually need help.

What About Home Prices?

Good question, especially if you want to buy a house.

The BLS Relative Importance Table shows housing is 42.20% of the CPI.

Owners' Equivalent Rent is the largest component in the CPI, accounting for a whopping 24.05% of the CPI.

The Owners’ Equivalent Rent (OER) Calculation method is absurd.

The expenditure weight in the CPI market basket for Owners’ equivalent rent of primary residence (OER) is based on the following question that the Consumer Expenditure Survey asks of consumers who own their primary residence: “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?

Home Prices vs OER vs Earnings

Already have a home?

If not, don't expect to find an affordable one. Sorry. You simply do not fit the BLS mode where averages rule.

BLS Model vs Reality

If you are in school, looking to buy a home, buying your own health care, or even having insurance but getting sick, then your measure of the CPI will be dramatically different than what the BLS tells you.

If you are 65, on Medicare, and own your own home. Congratulations. You fit the BLS CPI mold perfectly!

Mike "Mish" Shedlock

Comments (59)
No. 1-13
Sechel
Sechel

one day i hope to turn on cable news and meet mr. hypoethical person whose cost of living mirrors the cpi

Jojo
Jojo

Those are sick (and not in a good way) prices compared to Medicare! So why are so many fighting to keep their "private health insurance" at these awful costs when current Medicare + a supplement plan is so much less costly? I thought people voted their pocketbook?

As to inflation, I want more! That way, Trump will ensure that everyone on SS gets a really nice increase this year, given that he is going to be struggling mightily to get reelected.

Mish
Mish

Editor

Curiously, ours is likely very close

1: I am on Medicare and my wife has company insurance.

2: We own our house free and clear

3: I buy food on sale and have a big freezer. There are only two of us so it is easy to stock up.

4: We have no student debt or education expenses

5: We have no credit card debt

6: We buy cars and keep them for a decade until they wear out

If you fit that bill you are probably close to to the reported CPI

njbr
njbr

An interesting thought-exercise--if an epidemic did occur here--what would the effect be on the health insurance industry? Would they walk away, or declare some sort of uncovered "act-of-god"? Or would they go down in flames valiantly spewing money to the end (Hah!)? Could individuals be liable for their own costs? What would the government be liable for? What about quarantine expenses? Who would draw the line? Are there re-insurers on the hook for these sorts of events? Would this break the insurance industry and move it to a single-payer system?

cindylouwho
cindylouwho

Health care costs are a big concern today.

My concern for the future is food shortages and a big increase in food prices. Extreme weather events, disease, loss of agricultural land, population growth, water shortages etc are going to impact agricultural production more and more as time goes by.

Carl_R
Carl_R

I predict that medical costs will accelerate over the next few years. As more and more boomers qualify for Medicare and switch from private pay to medicare it will create a problem. Doctors and hospitals get paid less by Medicare than from private insurance. They can't increase prices on medicare, so they will have to increase it more on private pay and private insurance.

shamrock
shamrock

"It does not count corporate costs. Why? The BLS is only concerned with "consumer" prices. No other measures of inflation are important."

Increased corporate health costs will presumably show up in the prices they charge for the end products, so the inflationary aspect will show up there. Why count it twice?

3 Replies

CautiousObserver
CautiousObserver

How do you know that increased corporate heath benefit costs do not have the effect of decreasing take home pay instead, reducing reported "wage inflation," and causing the Fed to under count increases in the real cost of living?

Stuki
Stuki

Touche!

Demand for output product, is much more price elastic, than supply of labor is, when the labor pool pretty much rendered entirely captive by complete dependence on their employer for affordable health insurance.

Busting people out of that captivity, is the best argument going, for a single payer system vs. the current one. Since while a single payer system will no doubt suck (government mandated/managed anything does); it will at least suck equally bad, regardless of if you stay or if you go, when faced with a shitty employer. Incentivizing employers to be less shitty, than the current one keeping employees in captivity regardless, does.

Realist
Realist

Hi Stuki. Single payer systems are not perfect. No system is. If /when the US moves to single payer, there will certainly be bumps along the way, and lots of complaints initially. However, if single payer in the US works like it does in most other developed countries, the costs should come down to levels seen in other countries. Just like auto manufacturing costs in the US are similar to those in Europe.

Tony Bennett
Tony Bennett

"BLS Reports Tame Inflation as Medical Costs Soar Out of Sight"

...

Yes. Look no further than current US Treasury Monthly Budget Statement. For first 4 months of fiscal year (starting October 1st) fedgov outlays for Centers for Medicare and Medicaid Services:

FY2019 ... $499.328 billion

FY2020 ... $563.851 billion

My math a bit rusty, but seems more than a couple of percent ...

abend237-04
abend237-04

Mish,
Mine looks much like yours, but we're all different. There should be a more sustained focus on the key drivers.

I think you should provide a public service by selecting an annual "Most Successful Rent-Seeker of the Year" award, along with stats explaining why, as well as a second and third prize for this prestigious honor.

The perennial winner presently will obviously be health care, but colleges certainly are in the hunt and deserve honorable mention. Their current funding model points kids to the quasi-pse, fed-backed loan scheme, bypassing the traditional loan committees of private banking. Their accum rake of $800 Billion in excess of the CPI, has made a whole generation of kids into indentured servants with student loan debt. All this without a single congressman or Senator taking heat or losing their jobs...Brilliant!

I nominate for third place the grant-and-subsidy-seeking AGW crowd. I just looked at my first 2020 utility bill and I'm being charged $0.266 per kilowatt hour now, almost exactly twice the national average. I'm buying their boondoggle for them: Brilliant!

There are tens of thousands of beltway lobbyists toiling year-round now with scant public recognition or reward beyond their million dollar salaries. You could fix that.

Realist
Realist

It is interesting to see that health care is only 7% of the calculation for CPI, yet it costs 18% of GDP. Even in other developed countries with single-payer health care, the cost is often 9% or 10% of GDP.

JohnFromNE
JohnFromNE

"Health Insurance" a sub-component of "Medical Care" has been up more than 20% y/y for several month. BLS calculates the change by subtracting claims paid from premiums collected with a relative importance of 1.17%. Our out of pocket for health insurance (Standard Medicare + supplemental) is over 8% of total expenses.

Carl_R
Carl_R

Another inflation shock on the horizon is the coronavirus. With China shut down, some goods will become scarce, and we can expect prices on them to rise. On the flip side, if coronavirus spreads rapidly here, we could see the reverse effect, if people stop going out, and stop doing things. So, with China shut down, we will see less supply. If the US shuts down, we will see less demand.

THX1138
THX1138

But this Can't be - The Democrats fixed healthcare under Obama. Didn't we all get $2,500 back like Obama promised?


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