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Slowdown in Health Care Services Price Growth Restraining Some Measures of Inflation, Says Dallas Fed Economic Letter

For immediate release: August 29, 2016


Video: Dallas Fed economist Jim Dolmas discusses the impact of an unprecedented slowdown in the growth of health care services prices on inflation.

DALLAS—An unprecedented slowdown in the growth of health care services prices is dragging down some measures of inflation, writes Jim Dolmas in the Federal Reserve Bank of Dallas’ latest Economic Letter.

For most of the past 50 years, health care services prices have risen faster than the overall rate of inflation, Dolmas writes. More recently, however, that growth rate has slowed from around 4 percent per year in 2004 to a low of about 0.5 percent in 2015.

“If you look back historically, health care services prices have always increased at a rate faster than prices in general,” Dolmas said in a new Dallas Fed Insights video. “Sometimes that difference has been bigger, sometimes smaller. It’s always been at least a full percentage point until you get to the 2010s, in which case that difference vanishes and goes to zero.

“So then for the first time, on a sustained basis, you have health care services prices rising at a rate no faster than prices in general,” he said.

Given the significant weight of health care services prices in overall inflation, this slowdown may offer a clue to the persistently low rate of consumer inflation since the Great Recession.

To assess the impact, Dolmas looks at the deviation between current inflation and longer-term average inflation with health care services prices excluded.

Excluding health care prices makes little difference in all-items, or headline, personal consumption expenditures (PCE) inflation.

However, when looking at core measures, such as PCE excluding food and energy, and the Federal Reserve Bank of Dallas’ Trimmed Mean PCE Inflation Rate, the impact of excluding health care services is much more substantial.

“In both cases, current rates of inflation look much closer to their longer run average rates when health care services are excluded,” Dolmas said. “That’s a very different picture than what you see with health care services included.”

Dolmas is a senior research economist and advisor in the Research Department at the Dallas Fed.

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Media contact:
Alex Johnson
Federal Reserve Bank of Dallas
Phone: 214-922-5288
Email: Alexander.Johnson@dal.frb.org