Doctor, doctor

One of the more politically-charged headlines to flash across the newswires in recent days is the revelation that Obamacare insurance premiums are going to rise very significantly for next year.  While there has been what appears to be a damage-limitation response, presumably from within the administration, to assure consumers that the vast majority of Obamacare subscribers will have the price rises absorbed by government subsidies, the underlying message remains an unfavourable one.

Macro Man has no wish to recreate the debates on the "woulds and shoulds" of health care provision that dominated the comments section in  2009 with all the cheery goodwill of your average Brexit argument.  Rather, his interest in the subject is an academic one on the potential impact upon market-moving macro variables.

It should be noted from the get-go that the macroeconomic data on health care is so contorted that it quite literally strains credulity.  According to core inflation weightings, health care is either 25% of expenditure, or 10%.   Put another way, it is either 25% more heavily weighted than shelter....or less than 25% of the weighting of shelter.

Source: Cleveland Fed

Cynical readers will be unsurprised to observe that the measure which gives healthcare a high weighting suggests that inflation in the sector is muted....

...whereas the alternative measure has noted broad-based increases across both medical services and commodities recently.  Indeed, the medical commodities component of the CPI is showing its highest inflation rate since 1992.

Beyond that, what are we to make of the government statistics on the actual consumption of health care?  Looked at it nominal terms, the growth rate has shown a secular decline over the last 25 years, just what you'd expect from an aging population....or B).

Looking at health care consumption in real terms paints a different picture, with real growth in a noisy trend around 2% per annum.   Quite why the data showed y/y growth declining at the beginning of 2013 for the first time in three decades quite eludes your author, though the subsequent spike coinciding with the introduction of Obamacare is probably easier to explain.

Anyhow, what are we to make of the Obamacare price rises?   Will they have a macroeconomic impact on inflation?  The answer appears to be "probably not", at least directly.   After all, health insurance represents only 0.7% of the CPI index, and even amongst the healthcare component of the PCE index, health insurance is only 6% of the total.

Source: Cleveland Fed

Of course, it is certainly possible that higher premiums will induce medical providers to demand more for their goods and services, which actually comprise a much larger component of the costs.  Moreover, it is also possible if not probable that even if consumers are not directly hit with a price increase, there will be indirect costs such as the Sisyphean task of switching providers or a reduction in covered providers/services.  Hedonically adjusted, that would certainly represent a higher cost!  (On the flip side, it is certainly possible that a Clinton administration would attempt to put a lid on drug prices, though how much assistance it would get from Congress remains to be seen.)

However, even if health costs to re-accelerate towards their historical norms, there is little to say that the Fed will react much if at all.   In fairness, there is little to suggest that monetary policy is the correct tool to address medical care inflation, particularly in a system as tortuous as that of the United States.  Can't you just imagine Yellen pooh-poohing a medically-induced rise towards 2% in the core PCE inflation rate as being not policy relevant? 

In the meantime, if the US really wants to ignite inflation, perhaps they should consider voting to withdraw from the EU.....