Inflation (ex-medical costs and insurance)

Barron’s Alan Abelson revisits an all too familiar subject: Inflation (ex-inflation) and fun with hedonics:

"Of course, the official measures of inflation like the consumer-price index are flashing everything’s jake, there is no inflation worth fretting about. At least one quasi-government agency, the Federal Reserve, isn’t reassured by what the CPI is registering, or Greenspan & Co. are downright sadistic: Why else have they been raising rates with monotonous regularity for the past year?

Many a time and oft we’ve noted the absurdities in the CPI and the obsession the Street has with the "core" numbers, which exclude food, fuel and shelter. Great, as someone has observed, if you don’t eat or drive and live in the park.

We are all too aware of the futility of relying only on prices that aren’t rising as an inflation gauge. And we are all too familiar with the contortions BLS puts the CPI model through in order to maintain that fiction. But what hasn’t been widely addressed is how the BLS treats the medical expenses and insurance in their basket of goods and services:

The latest Liscio Report, authored by the estimable Philippa Dunne and Doug Henwood, notes that "medical expenses, certainly one of the great sources of cost pressures in the U.S. economy, are rather badly accounted for in the CPI." They go on to recount that even though health-insurance premiums have been rising about 10% a year for a long spell, the CPI medical component was up just 4.4% in the year ended September. Health care as a whole, moreover, accounts for roughly 15% of GDP, but 6.4% of the index.

"While it is true," comment Philippa and Doug, that "most people don’t pay for health insurance directly, conceptually, employer-paid health care is a service we are indirectly buying with part of our wages. And more of us are buying insurance directly, as employers drop coverage, and co-pays and deductibles rise inexorably."

They go on: "With managed care slapping all kinds of restrictions on coverage and providers, any constant-quality measure would be showing sharp hidden price increases. But, instead, the Bureau of Labor Statistics assumed, as it puts it, "the level of service…is strictly a function of benefits paid."

Philippa and Doug observe: "We’ve heard a lot about how the CPI is overstated because the BLS fails to adjust for quality improvements, but here’s a glaring example of exactly the opposite problem."

Nice work by the Liscio Report in detailing the specifics.  Of course, Abelson gets the last word in: 

"Hey, guys, get real. It’s tough enough to come up with numbers month in, month out that demonstrate there’s no inflation without complicating the job. And, besides, the complaints about the CPI failing to adjust for quality improvement that you’ve been hearing must be the bewailing of the witless or somebody trying to be funny.

Hedonics, anyone?"

Indeed . . .


Plethora of Bulls
Alan Abelson
Barron’s, Novermber 21, 2005

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What's been said:

Discussions found on the web:
  1. Favour commented on Nov 19

    Men! You are dead right. With the increasing rate of medical issues and the rising medical cost, I really wonder where we will finally land.

  2. cm commented on Nov 19

    My paycheck deduction for healthcare will go up 50% next year. And that doesn’t count what my employer pays “out of their pocket”, i.e. the pocket that I’m helping them to fill.

  3. Tim commented on Nov 19

    I did some work on this a week ago and thought it fair to say that if medical care costs were counted more in accordance with how they are experienced by consumers, based on publicly available data about medical costs and consumption expenditures other than the CPI, then the CPI all items and the CPI core would both be about one point higher:

    Open Enrollment and the CPI – Part One

    Open Enrollment and the CPI – Part Two

    Combining this with the owner’s equivalent rent vs. home price difference of over two points:

    Home Ownership Costs and Core Inflation

    and it’s pretty easy to make the case that, the CPI is understated by more than three points, when looking at prices people actually pay for things.

    That doesn’t make the most recent real GDP number sound so good.

  4. Darrell commented on Nov 19

    I’m afraid health care is a runaway train headed towards the precipice.

  5. Sean-Paul Kelley commented on Nov 20

    I have a real problem with this paragraph in Abelson’s otherwise humorous essay:

    “Even the fuss over how we treat Iraqi prisoners has taken on a livelier cast with the disclosure that our Iraqi allies aren’t averse to the use of the rack on their own Iraqi prisoners. All we’re doing, at worst, it turns out, is adhering to the customs of the country. So why all the lilly-livered bleating”

    I can think of at least ten things wrong with this paragraph. He or his editors should have dropped it from the piece. It’s simply disgusting to suggest that it’s ok to torture. Full Stop.

  6. Sean-Paul Kelley commented on Nov 20

    I fully recognize that I probably look like a wet-rag, typically self-righteous Liberal spoiling everyone’s fun and whatnot. Fair enough. I’m a big boy and can handle it. I promise you, I have a sense of humor and that we do take ourselves too seriously from time to time. And Abelson’s is a funny essay. As is most of his work.

    I just think the essay would have been better had the joke about torture not been included. It reminded me of Whoopi Goldberg’s first HBO special. The whole thing is hysterical until she gets to the part about the ‘wire coat hanger’ and it all goes downhill from there.

    Sorry to come across like a spoilt-sport. I promise I am not. So, I will stick my foot back in my mouth–now that I am thouroughly embarrassed–and just read. :-)

  7. Barry Ritholtz commented on Nov 20

    I don’t believe it was a joke — it was SARCASM;

    Sarcasm is sneering, jesting, or mocking a person, situation or thing. It is often used in a humorous or ironic manner and is expressed through vocal intonations such as over-emphasizing the actual statement or particular words.

  8. Sean-Paul Kelley commented on Nov 20

    My father has always said that sarcasm is a poor form of communication. He may or may not be right. But for the purposes of the present conversation can I just ask where I might go to get this egg off of my face? :-) Pretty please?

  9. Bill commented on Dec 10

    I did some calculations a couple years ago and concluded if my health insurance keeps rising at the historical rate of around 15 percent, my individual policy in 20 years will cost $40,000. And, that is without age step increases.

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