An update on non-housing services inflation | CEA | The White House

In a recent blog post reviewing the latest CPI report, the CEA showed how a major component of inflation, basic services excluding housing (also known as non-housing services or the NHS), has had recently sped up. Given the broad decline in inflation to around two-thirds of its peak by mid-2022, we wanted to take a closer look at what is driving this apparent acceleration in the NHS and assess its prospective role in the future trajectory of the inflation

We find that the recent acceleration in NHS inflation is largely driven by unusual movements in the CPI measure of health insurance costs, about which two points stand out.[1] First, unlike most of the CPI, much of what drives this category has little to do with the prices people pay for these services, and second, our expectation is that its contribution to inflation decrease significantly after new data is incorporated in April. CPI data.[2]

As our recent post showed, a useful decomposition is to divide core CPI inflation into three broad categories, shown in the table below. While housing and basic goods are self-explanatory, the NHS share of core inflation includes dozens of different sub-sectors, including public services such as rubbish removal, medical care such as doctor visits, transportation such as car rental and personal services such as haircuts, among many others.

Table 1. Core CPI inflation, 6-month annualized change
June-2022 February-2024
fee contribution fee contribution
Total Core (100%) 6.2 3.9
Housing (43%) 6.6 2.6 5.7 2.4
Basic products (24%) 3.9 1.1 -1.5 -0.4
Basic services not related to housing (33%) 7.9 2.6 5.9 1.9
Council of Economic Advisors
Sources: Labor Statistics Office, CEA calculations.
From March 20, 2024 at 2 p.m.

The table shows that, while core inflation in services other than housing contributed about 0.7 percentage points less to core inflation (1.9 2.6) in February 2024 than in June 2022, inflation in this category it remains high. Previous work by the CEA suggested that, as services tend to be more labour-intensive than the other two sectors, the path of NHS inflation would depend in part on the cooling of the labor market, particularly for sub-sectors that we identified as being sensitive to wages.[3] The figure below shows that while PCE inflation in wage-sensitive subsectors has declined from its peak, in recent months its contribution has flattened.

But there is something else to note in the NHS that is partly driving the recent acceleration: the way the CPI measures the cost of health insurance. Figure 2 shows extreme volatility in this part of the index. Rather than reflecting actual jumps in costs, these steep ups and downs reflect the way the BLS measures that cost.

The CPI typically measures the direct retail costs to consumers of goods and services. Doing this for health insurance is complicated because premiums paid to health insurers partially reflect the prices paid by health insurers to doctors, hospitals, and pharmacies, meaning the BLS must divide premiums into medical services provided vs. health insurance services provided Therefore, the BLS uses an indirect measure that deducts the costs of health insurance services from retained earnings premiums received from health insurers less benefits paid to providers. Data on retained earnings, however, are measured only with a substantial lag, so the health insurance portion of the CPI does not necessarily reflect the real-time costs of health insurance to consumers. Note that this measurement challenge was particularly acute during COVID, when consumption of health care services declined dramatically, leading to a sharp increase in premiums received minus benefits paid, even without a corresponding increase premium levels.[4]

Figure 3 shows 6-month annualized NHS inflation with and without the health insurance component. This latter series (light blue) shows less decline in the first half of 2023 and then less acceleration from the second half of 2023.

Another factor behind the recent acceleration of the NHS is air fares. This is also a volatile category and one of many in the core CPI that reflects a pass-through of energy prices to consumers. In this sense, it is less reflective of the true core inflation rates which are designed to omit volatile energy costs. When we remove both health insurance and airfares from NHS inflation (green line), we see that while NHS inflation remains high, its recent acceleration is further reduced.[5]

Although NHS inflation, excluding health insurance and air fares, peaked at 6.8%, substantially lower than the peak of 7.9% for headline NHS inflation, only has fallen slowly, reaching 5.8% in February 2024 (roughly similar to the overall NHS). We expect that as labor market pressures continue to cool, keeping unemployment low, and as health insurance costs update, this component should also decline. In any case, the CEA will continue to monitor and report on this and all other factors affecting inflation.

[1] Since 2020, the standard deviation of the six-month annual growth rate of health insurance services is three times larger than in the pre-COVID period.

[2] This expectation is based on the CEA’s approximate replication of the BLS methodology to incorporate retained earnings data from the National Association of Insurance Commissioners (NAIC). CEA analyzed the most recent NAIC report with data for the first half of 2023 that will be incorporated into the CPI with the April data release.

[3] Wage-sensitive subsectors are those whose prices have a positive and significant correlation with wage growth, as explained here.

[4] According to data from the National Association of Insurance Commissioners, health care utilization has rebounded from the COVID lows and remained slightly above pre-pandemic levels through 2022, the latest year of data available.

[5] Note that health insurance and airfares together account for only 1.7 percent of the core CPI basket. Basic services, excluding housing, health insurance and airfares, account for about 33 percent of the core CPI.

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