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posted on 04 September 2016

Health Care Services Depress Recent PCE Inflation Readings

from the Dallas Fed

Health care services, which historically helped push core measures of inflation higher, have restrained recent readings. Among them is the personal consumption expenditures price index, favored by Federal Reserve policymakers deliberating interest rate changes.

The growth rate of health care services prices has slowed dramatically, from around 4 percent per year in 2004 to a low of about 0.5 percent in 2015. The rate has since moved slightly higher, to just less than 1.2 percent on a 12-month basis in 2016.

At the same time, overall consumer price inflation has been persistently low following the 2007 - 09 Great Recession. Inflation as measured by the all-items price index for personal consumption expenditures (PCE) and its core variants - PCE excluding food and energy, and the Federal Reserve Bank of Dallas' Trimmed Mean PCE inflation rate - has been below 2 percent since 2012.

Has the slowing in health care services inflation contributed substantially to the low rates of PCE inflation since the Great Recession? The evidence indicates that health care services prices have been a significant drag on core PCE inflation since 2012. However, their impact on allitems, or headline, PCE inflation has been less noticeable against a backdrop of volatile energy price movements.

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Source: documents/ research/ eclett/ 2016/ el1611.pdf

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