Health Care Costs Slow: Inflation Curb

Photograph by Patrick T. Fallon/Bloomberg

Dental work performed at a free health clinic for the uninsured and underinsured at the Los Angeles Sports Arena.

The cost of health care in the U.S. is rising at the slowest pace in four decades, helping curb inflation.

The consumer-price index dropped 0.4 percent in April from the prior month, a second consecutive decrease and the biggest since December 2008, figures from the Labor Department showed today. While that was due to a decrease in gasoline — prices at the pump slumped 8.1 percent last month — there was more going on beneath the surface.

Health care, long the culprit behind sustained gains in inflation, is now showing much more modest price increases. Medical expenses were little changed in April, the first time without an increase since July 2010. Taking it out a few decimal points actually showed a 0.02 percent drop, making it the biggest decline since November 1975 – just goes to show how rare even such small declines are.

Over the past six months, medical care costs were up 0.9 percent, the smallest advance over a similar period since March 1972.

Medical commodities, the term used by economists at Labor to describe things such as prescription drugs and stethoscopes, got the ball rolling when those prices peaked late last year. They were 0.7 percent cheaper in April than in August, the biggest eight-month drop in records going back to 1967.

More recently, medical services — everything from visits to your dentist and ophthalmologist to nursing-home care and hospital stays — is following suit. The cost of hospital care, for example, fell 0.7 percent in April alone, the biggest one-month drop ever.

The reason for the turnaround will require additional reporting. The consequences for fiscal and monetary policy, though, may be easier to establish.

Should it continue, it will help bring down the federal budget deficit by curbing entitlement programs including Medicare and Medicaid.

It may also influence Federal Reserve policy makers who are trying to spur growth and prevent inflation from dipping too far. Medical care accounts for about 17 percent of the Commerce Department’s personal consumption expenditure price gauge excluding food and fuel, according to Eric Green, an economist at TD Securities in New York. That’s more than twice as much as in the consumer-price index.

The Commerce Department’s gauge is the one tracked by the central bank to determine what to do next, i.e. step on the gas pedal if it’s too low or take your foot off the accelerator if it starts to pick up.

Using today’s CPI data, economists at Morgan Stanley in New York project the Commerce Department’s figures, which will be released at the end of the month, will show the core PCE index rose 1 percent over the past 12 months, the smallest year-to-year increase since records began in 1959.

The Fed’s stated goal is to keep inflation over the longer term at around 2 percent. Do I hear QE3 anyone?



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