Wednesday, January 22, 2014

Why The Fed's Favorite Measure Of Inflation Is So Much Lower Than The Other Indexes



The Federal Reserve's favorite measure of inflation — the year-over-year change in the price index of core personal consumption expenditures — has been diverging from the more widely-followed year-over-year change in the core consumer price index, as the chart illustrates, writes Business InsiderPart of the explanation relates to medical care costs, as Goldman Sachs economist Alec Phillips explains in a note to clients:

Medical price inflation has been unusually restrained over the last several months, reaching a near-record low 1.1% year-on-year increase in August, and hovering just above that level since. While some of this reflects low inflation in the broader economy and it is possible that some of the slowing could signal an easing of medical price inflation for other reasons, we believe that much of the recent trend is also clearly due to exogenous policy influences: First, sequestration cut the price that Medicare pays for most services by 2%, along with the more publicized cuts to defense and non-defense federal spending. Second, the Affordable Care Act reduced payment rates for most segments of Medicare starting in late 2010.
We estimate that Medicare payment changes are holding down year-on-year inflation in the core PCE price index by 16bps, while the reduction in the core CPI index is a much more modest 2bps. To estimate this, we calculate the actual reduction in the reimbursement rate for each segment of Medicare (e.g., inpatient hospitals) as a result of the legislation. We then estimate the share of total spending for each healthcare service paid by Medicare and use these to estimate the effect on health care services inflation in each price index.
The effect on the core PCE index is much greater than the core CPI index mainly because of coverage differences. While PCE includes virtually all health spending, CPI includes only health spending paid by the consumer. Regarding Medicare, the distinction for inclusion in CPI is drawn by the source of financing: services financed by the Medicare trust fund ("Part A") are not included in the CPI, while services financed in part by monthly premiums ("Part B") are included.
The chart below shows how cuts to Medicare have affected the medical services inflation component of both core PCE and core CPI.
Without the cuts, medical services inflation would be significantly higher in the core PCE index.

Phillips says most of the effects of the Medicare reimbursement reduction should fade in 2014.
"First, sequestration should have only a one-time effect on medical price growth," writes Phillips.
"The effect on the level of prices resulting from the cut will remain in place through the end of the decade, but no further reductions will take place under sequestration so there will be no further effect on the growth of payment rates. Sequestration for Medicare took effect in April 2013 — a month later than for other categories of spending — so the year-on-year effect of sequestration should disappear in April 2014."

5 comments:

  1. Shhh. Don't tell our favorite troll, Jerry Wolfgang, that prices are higher than the government reports.

    He also believes the economy is growing and that the unemployment rate is 6.7%…because Obama said so. And Obama would never lie, right?

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    1. U3 is 6.7% according to the labor department, not Obama. During the past 12 months, the employment level grew by 1.3 million (1%), the labor force shrank by 547,000 (-.4%) which caused the unemployment rate to fall by 1.2%. Would love to hear you explain why Obama is rigging a shrinking labor force. Most view a labor force shrinking by a half percent as bad news.

      If you go to FRED (which suddenly went down after I checked the data or I would post a link) and plot both series indexed to 1980 as 100, you will see that core CPI has outpaced core PCE consistently since 1980. You can't see the trend if you plot it as "percent change from a year ago"

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    2. The Number Of Working Age Americans Without A Job Has Risen By Almost 10 Million Under Obama
      If you want a much more accurate reading of the employment picture in America, just look at the employment-population ratio. The percentage of working age Americans that actually have a job continues to stagnate at an extremely low level. In fact, the percentage of working age Americans that are employed has stayed between 58.2 percent and 58.8 percent for 52 months in a row...
      Does that look like an "employment recovery" to you?

      Because no matter how hard I squint my eyes, I just can't see it.

      The percentage of Americans that actually have jobs should have bounced back at least a little bit by now.

      But it has not happened.

      And guess what? Most people don't know this, but the U.S. economy actually created fewer jobs in 2013 than it did in 2012. So the momentum of job creation is actually going the wrong way.

      No matter how rosy the mainstream media makes things out to be, the reality on the ground tells an entirely different story.

      http://theeconomiccollapseblog.com/archives/number-of-working-age-americans-without-a-job-has-risen-by-almost-10-million-under-obama

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  2. A refreshing reminder that our 'free market economy' already has large and broad enough price controls to influence different measures of price inflation differently.

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  3. Got Milk? Cattle and Milk Prices Soar with Fed Balance Sheet Expansion (Along With Stocks But Not Median Income)

    So, less real median household income and skyrocketing beef and dairy prices. Well played Central Banks!

    Got milk?

    http://confoundedinterest.wordpress.com/2014/01/22/got-milk-cattle-and-milk-prices-soar-with-fed-balance-sheet-expansion-along-with-stocks-but-not-median-income/

    ReplyDelete