Health care costs are driving up inflation

Kimberly Adams Feb 19, 2020
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Alex Wong/Getty Images

Health care costs are driving up inflation

Kimberly Adams Feb 19, 2020
Alex Wong/Getty Images
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Part of the Federal Reserve’s dual mandate is to keep prices more or less stable, which generally means keeping inflation around 2%. There are lots of ways to measure inflation, including one indicator that was released Wednesday.

The producer price index was much higher than analysts were expecting. The so-called “PPI” looks at what companies pay for the goods and services they buy to produce goods and services. This may mean we’re creeping closer to the Fed’s inflation target.

These new numbers — up 0.5% in January — surprised a lot of experts.

“That may not sound like a lot, but for a monthly number, that is quite a bit,” said Richard Weiss, senior vice president at American Century Investments. It was the biggest jump in this measure of inflation in more than a year.

“If you start to see producer prices rise, you can almost assuredly count on consumer prices rising down the road,” Weiss said.

Much of the bump came from services, not goods. Part of that was higher health care prices because of changes to Medicare rules.

Robin Anderson, a senior economist at Principal Global Investors, said even if the spike is a one-off, January’s numbers reflect a long-term trend.

“What you do see is a difference between what’s going on in services inflation and what’s going on with goods inflation,” Anderson said. “Goods inflation has been pretty weak for a while.”

And what’s happening with services gives us a hint as to what’s ahead for other inflation measures.  

“Today’s PPI numbers, along with some of the other inflation data that we’ve been seeing, just increases our confidence that we will move in the direction that we’ve been expecting,” said Tony Rodriguez, head of fixed income strategy at investment firm Nuveen.

That means getting closer to the Fed’s 2% target, but slowly — with an emphasis on slowly, Rodriguez said.

And it will take another few months of data before most economists are convinced inflation’s really on the rise.

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