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 . . .

>

Source:
Plethora of Bulls
UP AND DOWN WALL STREET
Alan Abelson
Barron’s, Novermber 21, 2005
http://online.barrons.com/article/SB113235807927801981.html

Category: Inflation

Impossible Returns? Hardly . . .

Category: Hedge Funds, Investing, Technical Analysis

Capacity Utilization Rates

Category: Economy

Housing Starts Soften; Builder’s Bear Market?

Category: Fixed Income/Interest Rates, Real Estate

Apprenticed Investor: There Are No Shortcuts

Category: Apprenticed Investor, Investing, Psychology

Regional Fed Banks Publications, Research and Data

Category: Federal Reserve

What the In-Crowd Knows

Category: Financial Press

Sony issues recall for DRM crippled CDs

Category: Intellectual Property, Music

Producer Prices Continue Ascent

Category: Inflation

PPI data — Fun with Statistics?

Category: Inflation