Slowing Health Costs Thwart Fed’s Inflationary Medicine

A welcome relief from rising health-care costs for U.S. consumers is being less warmly received at the Federal Reserve.

The slowdown is frustrating the efforts of Chair Janet Yellen and her colleagues to lift inflation out of the doldrums, suggesting they will need to press on with record-low interest rates.

Price increases, not counting volatile food and energy costs, decelerated to a 1.1 percent year-over year pace in February from 2 percent two years earlier, with medical goods and health-care services accounting for almost a third of the slowdown, according to data compiled by Bloomberg based on the government’s personal consumption expenditures price index.


The cost of health-care services rose just 0.8 percent in February from a year earlier, compared with an average 2.6 percent pace in the prior 10 years. Prices of medical goods such as prescription drugsrose 2.2 percent, down from the 10-year average of 2.7 percent.

Behind the slowdown in medical costs: cuts in Medicare reimbursements under last year’s budget sequestration, and an influx of cheaper generic drugs as patents expired on brand-name prescription medications. Downward pressure on health costs will ease this year with fewer patent expirations and no repeat of sequestration. Still, that won’t be enough to lift overall price increases to the Fed’s 2 percent goal.

"It’s going to be a slow grind for medical care this year overall,” said Omair Sharif, an economist at RBS Securities Inc. in StamfordConnecticut. Health-care inflation levels are "not going back to the pre-recession days.”

Volcker, Yellen

The Fed, which conquered runaway inflation in the 1980s under Paul Volcker’s chairmanship, is now trying under Yellen to head off the opposite problem, persistent disinflation. Yellen has said policy makers are aware that a lack of inflation could "pose risks to economic performance.” Low inflation makes it harder for borrowers to pay off debts and for businesses to boost profits.


Investors are showing doubts about whether the Fed will succeed in rekindling inflation and are moving money out of exchange-traded funds tracking U.S. inflation. Traders pulled $524.6 million in the five days ended April 7 from the iShares TIPS ETF, the largest fund tracking Treasury Inflation Protected Securities. That erased all of the inflation bets accumulated in March, when the fund saw inflows of $326.8 million.


-By Michelle Jamrisko and Ilan Kolet -

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