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Schrodinflation: Healthcare Costs Are Either Soaring Or Flat, Depending On How They Are...

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Following Yellen's Friday speech, the phrase "High-Pressure Economy" has attained something of a viral status within the economist community. And while there is little risk of US economic growth, much of its supported by mandatory spending on Obamacare which now feeds directly into GDP as a component of "healthcare spending", hitting an even remotely "high-pressure" state, with both Q3 and Q4 GDP expected to print below 2% according to regional Fed forecasts, one place where there is substantial "high pressure", is in inflation.


While we noted earlier today that core CPI posted its 11th consecutive print above the Fed's mandated target of 2%, even as the unemployment rate is at the "full mandate" of 5% or lower, here are several charts showing that if the Fed is worried about inflation being too low, it shouldn't.


The first chart shows the dramatic recent surge in Medical Care CPI:






The story of soaring Health Insurance costs is well-known, and it will only get worse.






And yet, we know the reason why the Fed may be "confused", perhaps on purpose. As Bank of America shows, healthcare inflation is either soaring if one looks at CPI data, or virtually unchanged, based on PCE. Behold: Schrodinflation.




Here is how BofA explained this odd divergence:


Healthcare prices have turned higher
: It is first important to understand the basic definition of healthcare inflation for CPI and PCE. Healthcare in PCE comprises all healthcare services, regardless of the payer. In contrast, the prices sampled in the CPI exclude transactions for which consumers pay no out-of-pocket expenditures/premium component. For example, CPI would exclude patients covered under Medicaid or Medicare part A. For both PCE and CPI, the price recorded is the price that the provider bills. Thus, if a procedure costs $1,000, and the patient only pays $200 out of pocket, both PCE and CPI will record a price of $1,000 and track how that price changes over time.
PCE healthcare prices are rising at a slower pace than CPI. The key reason is that government policies have restrained price increases for services reimbursed under Medicare/Medicaid, biasing PCE lower.


Incidentally, this is something we noted back in June 2015 in "With The Spread Between CPI And PCE Blowing Out The Most Since 2009, Is The Fed Making A Big Mistake."




Furthermore, the surging healthcare costs, which they are, are all a function of just one thing: the same one we noted last May: "Why The US Consumer Is About To be Crushed: The Obamacare Inflationary Deluge Arrives."


As is well-known, the Fed prefers PCE as its indicator of inflationary pressures; at a time when it is desperate to avoid the soaring inflation in such a major source of consumer spending as healthcare, and give itself more leeway to keep rates low, we can see why.


But no matter how it is measured, when looking at that key "other" critical cost, rents, it could hardly get clearer: as the Census bureau has shown recently as per its update of median asking rents, rents are simply soaring.






But fear not: the administration is on top of it. As reported earlier today, the federal government will grant millions of social security recipients with a .... 0.3% cost of living benefits increase. So there.


BREAKING: The federal government says millions of Social Security recipients will get a 0.3 percent increase in benefits next year.


— The Associated Press (@AP)




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