- Starting in October, health insurance is poised to act as a counterweight that will support inflation for about a year, economists say.
- Health insurance prices have fallen by approximately 3-4% per month since October 2022.
- For a year starting in October, the health insurance CPI will begin to increase by just over 1% month over month.
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Health insurance prices are difficult for economists to quantify.
The BLS does not measure direct costs to the consumer such as monthly premiums. This is because these premiums do not offer the same quality of insurance. Benefits and risk factors vary from policy to policy, for example.
“Price changes between health plans of varying quality cannot be compared, and any method of adjusting quality to facilitate price comparison would be difficult and subjective,” according to a BLS fact sheet.
Instead, the agency measures health insurance inflation indirectly based in part on health insurers’ profits. Profit margins serve as an indicator of consumer prices.
The BLS updates these calculations once a year in October.
It appears health insurance prices measured in the CPI “are going to start to rebound again,” said Andrew Hunter, deputy chief U.S. economist at Capital Economics.
Health insurance prices have fallen by around 3-4% per month since October 2022, helping to lower inflation at a time when other indicators have proven stubbornly high.
Now, for a year starting in October, the health insurance CPI will start to rise a little more than 1% month over month, said Mark Zandi, chief economist at Moody’s Analytics .
At the start of the Covid-19 pandemic, health insurers’ profits jumped. Consumers still paid premiums but were generally not allowed to go to the doctor or hospital for elective procedures.
But consumers used their insurance more often in 2021. Insurers’ overall profits declined because they paid out more in insurance benefits compared to 2020. As a result, monthly inflation figures turned negative.
The updated BLS calculation will assess insurer profits in 2022, which were stronger than the previous year — and that’s the dynamic that will be reflected in the next CPI update, Zandi said.
The US Federal Reserve raised interest rates aggressively early last year to curb persistently high inflation. Financial experts expect the central bank to be near the end of this cycle, if not already.
Annual inflation has fallen significantly since its peak of 9.1% during the pandemic in June 2022 – the highest since 1981 – to 3.7%. But we are not yet back to the goal.
Anything that keeps inflation high can increase the chances that the Federal Reserve will raise borrowing costs again, economists say. Federal Reserve Chairman Jerome Powell said in August that inflation “remains too high” and that the Fed was “prepared to raise rates further.”
When assessing inflation trends, policymakers tend to prefer an indicator that does not take into account food and energy prices, which can be volatile. This measure is known as “core” inflation.
Getting back to the target would require consistent core CPI figures of around 0.2% per month, economists said.
The health insurance index subtracted about 3 basis points, or 0.03%, per month from the core CPI, Zandi said. In October, that will change. This will add more than one basis point, or 0.01%, to the monthly core CPI, he estimated.
Over the past year, health insurance has reduced the base CPI by more than 0.2 percentage points. That will increase it by less than 0.1 percentage points in the coming year, Zandi said.
“It’s small in the grand scheme of things,” he said. “But when you’re fighting for every basis point of inflation, it’s important.”