CEPR

August 13, 2019 (Prices Byte)

By Dean Baker

Spending on prescription drugs is up more than 7.0 percent over the last year, even though the CPI shows a small decline.

The overall Consumer Price Index (CPI) rose 0.3 percent in July, with the core index also rising 0.3 percent. The July increase brought the rate of inflation in the overall CPI to 1.8 percent over the last year, while the core index is up 2.2 percent.

Rent continues to be by far the largest factor driving core inflation. The core, excluding shelter, was up 0.3 percent in July and is up by just 1.3 percent over the last year. In fact, inflation in the core index, excluding shelter, appears to be slowing slightly. The annual rate, comparing the last three months (May, June, and July) with the prior three months, is just 1.1 percent.

By contrast, it appears that rental inflation is actually picking up slightly. The owners’ equivalent rent (OER) index rose at a 3.6 percent annual rate when comparing the last three months with the prior three months. It is up from a 3.4 percent rate over the last year. (OER is a purer measure of rent since it excludes utilities that often are included in the rent proper index.)

While inflation in most areas of the core index outside of rent appears well contained, medical care costs may again be a problem. They rose 0.5 percent in July and are up 2.6 percent over the last year. There is clear evidence of acceleration, with the index rising at a 3.9 percent annual rate when comparing the last three months with the prior three months.

Within medical care, health care insurance is by far the biggest problem. The insurance index increased by 1.7 percent in July and is now up 15.9 percent over the last year. It is important to remember that this index is measuring just the administrative costs and profits of insurers, not the premiums paid by households or employers.

By contrast, prescription drug prices in the CPI appear to be under control. While the index rose 0.4 percent in July, this follows declines in the prior two months. The CPI prescription drug index is now down 0.8 percent over the last year.

However, this may not reflect people’s experiences in paying for drugs. Spending on prescription drugs has increased by more than 7.0 percent over the last year. The large difference is due to the fact that the CPI only measures changes in prices of the same drug. Insofar as patients are using new and more expensive drugs it will not be picked up in the CPI. 

There were several anomalous price movements in the core in July, mostly on the high side. Apparel prices rose 0.4 percent in July after rising 1.1 percent in June. They are still down 0.5 percent over the year. They are likely to dip again in future months. Used vehicle prices rose 0.9 percent in July after rising 1.6 percent in June. They are up 1.5 percent over the last year. By contrast, new vehicle prices fell by 0.2 percent in July and are up just 0.3 percent over the last year.

Airfares increased by 2.3 percent in July. They are up 1.3 percent in the last year. On the other side, sporting goods prices fell 1.4 percent in July, they are down 1.1 percent over the last year.

On net, we can probably expect the core inflation rate to be somewhat lower as inflation in components such as apparel and used vehicles levels off or turns negative. Overall, the picture for inflation continues to be overwhelmingly benign with the major exception of rents and now quite possibly medical care. The latter is a special cause for concern since health care inflation appeared to be largely under control. The explosive rate of growth in health insurance costs is especially alarming.