Friday, December 16, 2016

CPI: Dramatic Drop in Prescription Prices

The Consumer Price Index rose 0.2 percent in November. Remarkably, medical prices were flat overall. This is the third month in a row we have enjoyed medical price relief. Prices of prescription drugs dropped by 0.6 percent. Even the prices of health insurance and hospitalization dropped a smidgeon!

Prices for physician services rose the most, by 0.6 percent, followed closely by other medical professionals (0.5 percent).  

Over the last 12 months, however, medical prices have increased 2.7 times faster than non-medical prices: 1.5 percent versus 4.0 percent. Price changes for medical care contributed 20 percent (one fifth) of the overall increase in CPI.

Many observers of medical prices decline to differentiate between nominal and real inflation. Because CPI is has been low until recently, even relatively moderate nominal price hikes for medical care are actually substantial real price hikes. More than six years after the Affordable Care Act was passed, consumers have not seen relief from high medical prices, which have increased over twice as much as the CPI less medical care since March 2010, the month President Obama signed the law.

(See Figure I and Table I below the fold.)


Technical NoteProfessor Christopher Conover explains why some scholars de-emphasize CPI and medical CPI as appropriate measures of inflation for health care, preferring another dataset, Personal Consumption Expenditures (PCE). There are very good reasons for such a conclusion. However, CPI comes out monthly. The PCE price index is updated only quarterly, and that is only for services. Prices for goods, such as drugs and medical devices, are updated only annually. Plus, consumers only really care about price increases they experience directly, not price increases borne by other economic actors.

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