Inflation has been lower than expected in the U.S.
One of the main reasons for this is because health care cost inflation has been extremely tame.
But that appears to be turning around.
“Healthcare inflation has begun to accelerate,” wrote Deutsche Bank’s Joe LaVorgna pointing to the new producer price index numbers. “The price of “selected health care industries” rose +0.3% in January following gains of +0.2% in December and +0.3% in November.”
These numbers are likely to have an amplified effect when we get an updated reading on the PCE deflator, the preferred inflation measure of the Federal Reserve.
“While these figures are not seasonally adjusted, we can see in the chart below that they track the seasonally adjusted health care prices in the PCE deflator very closely, as they should, since the former are an input into the latter,” added LaVorgna. “The correlation coefficient between the two series is a high 0.75. The acceleration in health care costs should push the core PCE deflator higher, thereby helping to narrow the 60 basis point gap between the year-over-year growth rates in the two series.”
The focus of the inflation conversation lately has been on wage growth, which also has been subdued. But if health care inflation acceleration is real, that conversation could shift quickly. And this could put the Fed under increasing amounts of pressure to tighten monetary policy sooner than later.