Economics / History

Gravity Defying Medical Inflation

On Tuesday Kevin Drum responded to Eric Morath of the Wall Street Journal:

The chart on the right shows real medical inflation—that is, medical inflation above and beyond overall inflation. As you can see, over the past 30 years it’s been on a noisy but fairly steady downward path. Each peak is lower than the previous one, and the same is true of each trough. If anything, though, this trend has slowed a bit over the past decade. It’s still on a downward slope, but it strikes me as unlikely that government policies have had an awful lot to do with this.

The FRED graph to which Drum refers has a striking feature that he does not mention:

Let me get this straight—in every recession during the last 33 years medical inflation rises as overall inflation drops?

Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Annual
1980 13.91 % 14.18 % 14.76 % 14.73 % 14.41 % 14.38 % 13.13 % 12.87 % 12.60 % 12.77 % 12.65 % 12.52 % 13.58 %
1981 11.83 % 11.41 % 10.49 % 10.00 % 9.78 % 9.55 % 10.76 % 10.80 % 10.95 % 10.14 % 9.59 % 8.92 % 10.35 %
1982 8.39 % 7.62 % 6.78 % 6.51 % 6.68 % 7.06 % 6.44 % 5.85 % 5.04 % 5.14 % 4.59 % 3.83 % 6.16 %
1983 3.71 % 3.49 % 3.60 % 3.90 % 3.55 % 2.58 % 2.46 % 2.56 % 2.86 % 2.85 % 3.27 % 3.79 % 3.22 %
1990 5.20 % 5.26 % 5.23 % 4.71 % 4.36 % 4.67 % 4.82 % 5.62 % 6.16 % 6.29 % 6.27 % 6.11 % 5.39 %
1991 5.65 % 5.31 % 4.90 % 4.89 % 4.95 % 4.70 % 4.45 % 3.80 % 3.39 % 2.92 % 2.99 % 3.06 % 4.25 %
1992 2.60 % 2.82 % 3.19 % 3.18 % 3.02 % 3.09 % 3.16 % 3.15 % 2.99 % 3.20 % 3.05 % 2.90 % 3.03 %
2000 2.74 % 3.22 % 3.76 % 3.07 % 3.19 % 3.73 % 3.66 % 3.41 % 3.45 % 3.45 % 3.45 % 3.39 % 3.38 %
2001 3.73 % 3.53 % 2.92 % 3.27 % 3.62 % 3.25 % 2.72 % 2.72 % 2.65 % 2.13 % 1.90 % 1.55 % 2.83 %
2002 1.14 % 1.14 % 1.48 % 1.64 % 1.18 % 1.07 % 1.46 % 1.80 % 1.51 % 2.03 % 2.20 % 2.38 % 1.59 %
2007 2.08 % 2.42 % 2.78 % 2.57 % 2.69 % 2.69 % 2.36 % 1.97 % 2.76 % 3.54 % 4.31 % 4.08 % 2.85 %
2008 4.28 % 4.03 % 3.98 % 3.94 % 4.18 % 5.02 % 5.60 % 5.37 % 4.94 % 3.66 % 1.07 % 0.09 % 3.85 %
2009 0.03 % 0.24 % -0.38 % -0.74 % -1.28 % -1.43 % -2.10 % -1.48 % -1.29 % -0.18 % 1.84 % 2.72 % -0.34 %

Drum claims looking back over 60 years, the trend lends itself toward pessimism:

I find it far more striking how pronounced the rise in real medical inflation has been in every postwar economic contraction with the exception of the 1950s and 1960 recessions (when I recreated Drum’s graph on the FRED website, the same odd phenomenon was present in the 1948-49 recession).  I have to ask—why would medical prices be rising as everything else drops?

Even stranger is that medical inflation seems to fall off rapidly after a recession officially ends (i.e: before economic recovery brings unemployment back down).  I have a few theories, chief amongst them that the acute stress from widespread job losses might explain the recession-induced inflation spikes, but the volatility of the 1970s speaks to the effects of the collapse of the fixed exchange system from March 15, 1968 to March 19, 1973 and the shockwaves that were unleashed by that seminal episode.  More on that later.

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