The BLS Pointy-Heads And Monetary Mission Impossible, Part 3

It was CPI day. So it might be expected that some anomaly in the monthly data would provide a timely reminder that Washington’s main inflation index isn’t all it’s cracked up to be. In the context of our Monetary Mission Impossible series, it might also provide further proof that the Fed’s fanatical quest to reach its 2.00% inflation goal is utterly misguided.

As it happens, the number -33.6% contained in the August CPI report fulfills both of these expectations and then some. This figure supposedly represents the Y/Y plunge in the cost of medical insurance!

That’s right. Anything connected to the medical delivery system was up by hefty amounts in August on a Y/Y basis, but the thundering collapse (purportedly) of health insurance costs allegedly saved the day. As shown below, according to the BLS the index for overall medical services was down -2.1% on a Y/Y basis in August when all of its other components where positive, some of them like dental care and home health services strikingly so.

Y/Y Change In CPI Medical Services And Its Components:

• Dental services: +5.3%;

• Eye care:+3.4%;

• Physicians: +0.3%;

• Home health services: +6.9%;

• Hospital services:+3.0%;

• Nursing home care: +6.1%;

• Health insurance: -33.6%;

• Overall Medical Care Services: -2.1%

Needless to say, how fully one-third of medical insurance costs up and disappeared over the last 12 months needs some ‘splainin’. That our friend Wolf Richter has done about as incisively as can be done—given the absurdity of the outcome.

Every fall, the Bureau of Labor Statistics, which produces the CPI, undertakes annual adjustments in how it estimates the costs of health insurance. It then spreads those adjustments over the following 12 months. Last year, this adjustment cycle started in October, and it will go through September this year…..

Inflation in health insurance is difficult to figure because numerous factors change, not just the premium but also co-pays, deductibles, out-of-pocket maximums, what is covered and what isn’t covered, drug formularies, etc., and there are all kinds of insurance plans out there, and they all differ locally and by state.

So the BLS uses a different method to estimate price changes of health insurance, the “retained earnings method,” which the BLS explains here. In the fall each year, it adjusts the index as more data become available.The entire index is an annual figure, divided into monthly increments,based on the annual “retained earnings” of insurance companies. So the month-to-month percent-changes of health insurance CPI are about the same every month for a 12-month period, and then it gets adjusted again, usually the other way.

Normally the annual adjustment isn’t such a huge deal, but this time, the adjustment was ridiculously gigantic, with totally perverse effects.

For the prior 12 months through September 2022, CPI overstated health insurance inflation by some amount. By September 2022, the health insurance CPI had risen by 28% year-over-year, which contributed to the big increase in CPI at the time.

Then in October 2022, the adjustment kicked in. Every month since then, the CPI for health insurance, thanks to this odious adjustment, plunged month-to-month by a ridiculous 4%, give or take. In July, it plunged by 4.1% from June.

This 4% month-to-month plunge, as opposed to a 2% month-to-month rise in the prior year, represents a month-to-month swing of 6 percentage points!

This chart shows the month-to-month percentage changes of the health insurance CPI, including the last 10 months after the odious ridiculous massive adjustments: