Health Insurance Prices Expected to Buoy Inflation Starting in October, Say Economists
Economists predict that health insurance will play a significant role in increasing inflation rates for about a year, starting from October. Since October 2022, health insurance prices have been steadily declining by approximately 3% to 4% per month. However, this trend is expected to reverse as the Consumer Price Index (CPI) for health insurance is projected to rise just over 1% month over month for the next year.
Quantifying health insurance prices is a challenge for economists. The Bureau of Labor Statistics (BLS) does not directly measure consumer costs like monthly premiums because these payments do not guarantee the same quality of insurance. The benefits and risk factors vary across different insurance policies. The BLS states that comparing price changes between health plans of varying quality would be difficult and subjective.
Instead, the BLS indirectly measures health insurance inflation by considering health insurers’ profits, which serve as a proxy for consumer prices. These calculations are updated annually in October. Andrew Hunter, deputy chief U.S. economist at Capital Economics, suggests that health insurance prices measured in the CPI will start increasing again in the coming months.
The decline in health insurance prices since October 2022 has helped lower inflation rates during a time when other metrics remained high. However, Mark Zandi, chief economist at Moody’s Analytics, anticipates a change in the trend. The CPI for health insurance is expected to increase by just over 1% per month for the next year, starting in October. This change is attributed to insurers’ stronger profits in 2022 compared to the previous year.
In the early stages of the Covid-19 pandemic, health insurers experienced a surge in profits as consumers paid premiums but were unable to access medical services. However, in 2021, consumers utilized their insurance more frequently, resulting in reduced aggregate profits for insurers. This led to negative monthly inflation readings. The forthcoming CPI update will consider insurers’ profits in 2022, which were stronger than the previous year.
The U.S. Federal Reserve had been aggressively raising interest rates since early 2021 to combat persistently high inflation. Experts believe that the central bank is nearing the end of this cycle, if not already there. Annual inflation has significantly decreased from its peak of 9.1% in June 2022, the highest since 1981, to 3.7%. However, it has not yet reached the target level.
Economists warn that anything that sustains elevated inflation increases the likelihood of the Federal Reserve raising borrowing costs once again. Federal Reserve chair Jerome Powell stated in August that inflation “remains too high” and that the central bank is “prepared to raise rates further.”
When considering inflation trends, policymakers prefer to focus on a measure that excludes volatile components like food and energy prices. This measure, known as “core” inflation, is used to assess the inflation rate. Economists claim that consistent core CPI readings of about 0.2% per month are necessary to reach the target level. In the past year, health insurance has reduced core CPI by over 0.2 percentage points, but it is projected to increase it by less than 0.1 percentage points in the coming year.
While this change may seem small, it can have an impact on the overall fight against inflation. “When you’re fighting for every basis point on inflation, it matters,” Zandi said.