Why health insurance is poised to make inflation jump

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Why health insurance inflation is hard to measure

Health insurance prices are a tricky thing for economists to quantify.

The BLS doesn’t measure direct consumer costs such as monthly premiums. This is because premiums do not buy the same level of insurance. Benefits and risk factors vary from policy to policy, for example.

“Price change between health plans of varying quality cannot be compared, and any quality adjustment methods to facilitate price comparison would be difficult and subjective,” according to a BLS fact sheet.

Instead, the agency measures health insurance inflation indirectly based partly on health insurers’ profits. The BLS calculates these calculations every year in October.

It appears that health insurance prices measured in the CPI “will start rebounding” again, said Andrew Hunter, deputy chief U.S. economist at Capital Economics.

Health insurance

prices have been declining roughly 3% to 4% a month since October 2022, helping to pull down inflation at a time when other metrics proved stubbornly high. Now, for a year starting in October, the CPI for health insurance will start rising just over 1% month over month, said Mark Zandi, chief economist at Moody’s Analytics.

How health insurance profits affect inflation

Early in the Covid-19 pandemic, health insurers’ profits jumped. Consumers were still paying premiums but were generally disallowed from visiting doctors or hospitals for elective procedures.

But consumers used their insurance more often in 2021. The insurers’ aggregate profits decreased because they paid more benefits in comparison to 2020. Why health insurance inflation is important

The U.S. Federal Reserve increased interest rates aggressively beginning early last year in order to curb persistently high inflation. Financial experts believe the central bank has reached the end of this cycle, if it hasn’t already. But it’s not yet back to target.

Anything that keeps inflation elevated may increase the odds the Federal Reserve raises borrowing costs again, economists said. Jerome Powell, Federal Reserve chair, said that in August inflation “remains excessive” and the Fed was “prepared to increase rates further.” When assessing inflation trends policymakers prefer to use a measure that excludes volatile food and energy costs. This measure is known as “core” inflation.

Getting back to target would require consistent core CPI readings of about 0.2% a month, economists said. Zandi stated that the health insurance index is subtracting approximately 3 basis points (0.03%) a month from core CPI. This will change in October. He estimated that it will add more than 1 basis point (0.01%) to the monthly core CPI. Zandi stated that it will increase the CPI by less than 0.1% in the next year. It’s important when you are fighting for every basis on inflation. “