Energy And Health Insurance Drive US Inflation Higher In October – Analysis

The overall Consumer Price Index (CPI) rose 0.4 percent in October, driven by a 2.7 percent jump in energy prices and a 2.2 percent rise in the cost of health insurance. The core CPI rose 0.2 percent for the month. Over the year, the overall CPI is up 1.8 percent, while the core index is up 2.3 percent. There is some modest evidence of accelerating inflation in the core CPI, with the annualized rate comparing the last three months (August, September, October) with the prior three months (May, June, July) being 2.8 percent. The annualized rate for the overall CPI for the same periods is just 1.7 percent.

Interestingly, this acceleration is not coming from housing. The rate of rental inflation slowed modestly in October, with the rent proper index rising just 0.1 percent, its slowest rate of increase since April of 2011. This was driven primarily by a slowing of increases in rent in the East, with the index for rent proper actually dropping slightly in October. By contrast, the index for rent proper in the West rose 0.5 percent for the month.

There appears to be some evidence of slowing of rents overall, with the owners’ equivalent rent (OER) index rising at an annualized rate of 3.0 percent comparing the last three months with the prior three months, down from a 3.3 percent increase over the last year. The OER index has more than three times the weight in the CPI as the rent proper index.

The major item driving the core inflation rate higher is medical care, with the index rising by 4.3 percent over the last year and at an annualized rate of 6.6 percent, comparing the last three months with the prior three months. This index accounts for more than 11.0 percent of the core CPI, meaning that it has added by more than 0.4 percentage points to the core inflation over the last year and almost 0.7 percentage points to the annualized rate, comparing the last three months with the prior three months.

Within the medical care index, by far the biggest problem is health insurance. This index has risen 20.1 percent over the last year and at a 22.9 percent rate, comparing the last three months with the prior three. It is important to remember that this is just the administrative costs and profits of insurers, this index is not measuring premiums.

The index for hospital and related services is also rising rapidly, increasing by 3.4 percent over the last year and rising at a 7.8 percent annual rate, comparing the last three months with the prior three months. The rapid inflation in this sector likely reflects increased consolidation in the industry. By contrast, the index for professional medical services rose by just 0.1 percent in October and is up 1.6 percent over the last year.

Inflation in most other sectors is well contained. New vehicle prices fell 0.2 percent in October and are up 0.1 percent for the year. Apparel prices dropped 1.8 percent in October and are down 2.3 percent over the last year. The index for college tuition was flat for the month and is up 2.0 percent over the last year.

The auto insurance index, which had been a problem sector, was flat in October and is down 0.2 percent over the year. Air transportation prices fell 0.4 percent for the month and are up 1.5 percent over the last year.

Restaurant costs are rising somewhat faster than the price of food, with the former index up 3.3 percent over the last year, with the food at home index rising just 1.0 percent. This 2.3 percentage point gap reflects the healthy wage growth for low-paid restaurant workers, due to both higher minimum wages in many states and cities and the tightness of the labor market.

Overall, this report shows that inflation remains well-contained almost everywhere, with the major exception of the health care sector. Rent continues to be a problem, but in many cities it seems that rental inflation is slowing, although that does not appear to be the case for West.