Health Insurance Is About to Boost U.S. Inflation

A change in how the government estimates health insurance costs is expected to give a slight boost to a popular U.S. inflation measure, reversing a trend that had been providing some relief in recent months.

Beginning with Tuesday’s release of the October consumer price index (CPI), the Bureau of Labor Statistics (BLS) will roll out a few changes to how it tabulates the category. In addition to a routine change in source data, the new methodology will aim to smooth some of the volatility and reduce time lags in the index.

After being a reliable drag on overall inflation for the past year, the new computation is widely anticipated to put upward pressure on the headline CPI, at least in the near term. It’ll also boost a narrower subset of services inflation that excludes energy and housing.

The Federal Reserve monitors so-called core services closely, but computes it based on separate price index figures within the personal consumption expenditures (PCE) and income report.

“We think the Federal Reserve will continue to look past these shifts in health insurance CPI, as these estimates do not factor into the construction of the PCE price index, the Fed’s preferred inflation gauge,” Barclays Plc economists led by Pooja Sriram said in a report. That metric “is much more comprehensive than the retained-earnings concept used in the CPI,” they said.

Since health insurance policies and premiums vary widely, the BLS computes the cost through an indirect method. Essentially, it reflects the business cost of offering consumers health insurance, whereas services for seeing a doctor or a hospital stay are calculated separately and are at or near record-high price levels.

The health insurance index, by contrast, is currently at its lowest reading in nearly six years. But what Americans actually pay for coverage is a different story.

U.S. employers expect the total benefit cost per employee to rise 5.4 percent, on average, next year—even after they make changes to their plans to slow cost growth—according to a preliminary survey from workplace consultant Mercer. Other polls have found that nearly 40 percent of Americans have had to forgo healthcare because they couldn’t afford it.

The CPI index of health insurance measures what customers pay into their policy that’s not distributed out in benefits—also known as the insurer’s retained earnings. The BLS currently receives this data annually but is switching to a semiannual update to reduce lags in the index.

For the past year, the health insurance category has fallen at a roughly 4 percent clip each month. Bloomberg Economics and Bank of America Corp. expect the BLS changes to result in CPI health insurance rising roughly 1 percent starting in the October report. Barclays sees that pace lasting through March 2024 once the BLS incorporates the semi-annual data, while Goldman Sachs Group Inc. expects the category to slow to a flat reading by April.

While those projections should only boost the core CPI by a few basis points (bps) at most, the change in methodology comes at a time when the path to getting inflation down to the Fed’s target has proved long and bumpy.

“Disinflation is not always a smooth ride,” Bank of America economists said in a note. “Health insurance inflation should prove to be another source behind our relatively firm core services and core CPI print.”

TD Securities forecasts a much larger impact—a 1.8 percent monthly rate for the year starting in October, which would add nearly half a percentage point to core inflation in the next 12 months.

The monthly and annual measures of overall CPI are expected to slow in October on retreating gasoline costs. But excluding energy and food prices, the core metric is seen staying at levels above the Fed’s target.

Copyright 2023 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.