E-piphany

There are a couple of potentially important changes to the CPI that will take effect in the next few months. It is worth thinking about how these will affect the data.

1. Sometime in “Spring 2018,” the BLS will reweight the physicians’ services index, which includes consumer out-of-pocket, Medicare Part B, and private insurance reimbursements, to better reflect the current market weights of various payer types.

This matters, because the ACA (nee Obamacare) caused a large shift in where payments were coming from, and one effect of that shift was to obfuscate actual inflation in medical care. Because CPI only includes payments that consumers make, and not the ones that government provides (Medicare Part A, Medicaid), large changes in the coverage population and the significant change in deductibles caused Medical Care inflation to do things that really didn’t make a lot of sense. We know that total spending on health care grew sharply under Obamacare as Medicare, Medicaid, private health insurance, and out-of-pocket spending all rose, but medical care inflation as measured by CPI sharply decelerated over the last 15 months. It isn’t because health care is suddenly more affordable; it’s because large change in the way medical care is paid for was bound to cause large change in the measurement of medical care. It is likely that reweighting this index to current weights will cause better stability in this measure – but at a higher level than the recent 1.7% rate. Since Medical Care is the main thing holding down core PCE, this will likely make the optics worse over the next year (and see what I have already said about the optics).

2. With January 2018 data, CPI for used cars and trucks will change from a three-month moving average to a single-month price change. The BLS says “This modification will result in an index that reflects price change closer to the reference period.”

This matters, because as I’ve been pointing out over the last few months the CPI for used vehicles is quite a bit below where private surveys of used car prices suggest it should be. The recent rise in used car prices is happening largely because Hurricane Harvey removed hundreds of thousands of vehicles from the road, but the BLS measure has been lagging behind the private measure of these prices. This is one of those effects that is expected to make the CPI optics worse in 2018, and this change could make it worse, faster. If CPI measures of car inflation merely converge with the blue line below, it’s worth about 0.5% on core inflation. Moving to a 1-month, rather than a 3-month measure will make this more volatile, but also will make it converge more quickly. Indeed, it makes this month’s CPI report even more interesting and creates a chance for a significant surprise higher as soon as this month.