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Healthy inflation? : Inflation in the healthcare industry vs. general CPI

Summary:
[embedded content] Some components of the consumer price index have consistently, over several decades, risen faster than the rest. This blog recently discussed education as one such component. The components of the CPI devoted to medical care have also seen faster price increases than the rest of the basket. Going back as far as the series are available, since 1948, the price of medical care has grown at an average annual rate of 5.3% while the entire basket, headline CPI, has grown at an average annual rate of 3.5%. In the past 20 years, in the regime of stable inflation, headline CPI has grown at an average annual rate of 2.2%, whereas the price level of medical care has grown at an average annual rate of 3.6%—about 70% faster. The graph above shows the two time series. Besides

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Some components of the consumer price index have consistently, over several decades, risen faster than the rest. This blog recently discussed education as one such component. The components of the CPI devoted to medical care have also seen faster price increases than the rest of the basket. Going back as far as the series are available, since 1948, the price of medical care has grown at an average annual rate of 5.3% while the entire basket, headline CPI, has grown at an average annual rate of 3.5%. In the past 20 years, in the regime of stable inflation, headline CPI has grown at an average annual rate of 2.2%, whereas the price level of medical care has grown at an average annual rate of 3.6%—about 70% faster.

The graph above shows the two time series. Besides the difference in their levels, it’s also notable how much less cyclical medical care inflation is. Although overall CPI inflation dips during recessions, medical care inflation stays steady.

The implication of these two features is far reaching: It’s symptomatic of the increasing share of income the U.S. spends on medical care. Beyond macro trends, the features of these two series themselves have policy implications. Indeed, indexing government healthcare budgets to overall CPI rather than medical care prices has implications for spending in real terms. This gap could also widen during recessions, when government help may be most in demand.

The CPI is intended to measure the price of goods consumers purchase directly, and therefore the medical care subset is actually measuring only the prices of out-of-pocket expenses. For healthcare, however, there’s a great deal of other spending going on. And the inflation rate of that spending is something a policymaker might need to know. Luckily, the BEA puts together a more holistic price index for healthcare spending—the health expenditures price index—which we add in the graph below. Although the history of this series is shorter, this measure of healthcare prices is still rising considerably faster than headline CPI: In 2001-2013, this measure of healthcare inflation rose almost 4% per year, whereas headline CPI rose 2.3% in this period and the other healthcare CPI rose 3.9%.

How these graphs were created: For the first graph, search for “Consumer Price Index Medical.” In the “Edit Graph” tab, convert the units to “Percent Change from a Year Ago.” Then use the “Add Line” feature to search for “Consumer Price Index All Items.” Add this line and again check that its units are the same. (FRED does this automatically, but it doesn’t hurt to check.) These series are both also available as chained indices, but for a shorter period. For the second graph, add to the first another line by searching for “Health Expenditures Price Blended Account.” Then restrict the period to show the entirety of the new line.

Suggested by David Wiczer.

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FRED Blog
The Federal Reserve Bank of St. Louis is the center of the Eighth District of the Federal Reserve System. This District includes Arkansas, eastern Missouri, southern Illinois and Indiana, western Kentucky and Tennessee, and northern Mississippi.

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