Inflation Gets its Groove Back; Healthcare Costs Blamed

The U.S. Department of Labor reported this morning the consumer price index (CPI) in the month of January rose at a rate of 0.2%.  The increase was more than economists, and the Federal Reserve, were expecting.

Excluding the costs of food and energy – called the core CPI in economic parlance — consumer prices rose 0.3% last month.  Economists had been expecting a 0.1% increase in the CPI and a 0.2% rise in the core reading.

So if food and energy weren’t the culprits, what was?  Healthcare costs and, somewhat ironically, tobacco prices, which were up 3.1%.  Medical care prices rose 0.8% in January, the biggest increase in 16 years. Prescription drug prices rose 1.1%, also the biggest increase in 16 years after falling for three months in a row. Physician services prices rose 1.2%, the most in 26 years.  (For more on increasing medical costs, see: Healthcare Expenses will Continue Brisk Climb.)

Although medical costs are trending upward, economists cautioned that January is the month that sees the largest increases in treatment and drug costs as providers set new rates for the year.

Scanning around other price categories, rents rose 0.4% in the month and hotel room rates were 1.1% higher.

The impact of the higher-than-expected price reading is generally felt to fall at the feet of the Fed.  Many market watchers had been hoping for an interest rate cut at some point this year.  If inflation continues above the Fed’s comfort zone, rates will not be cut.

The core CPI is up 2.7% in the past year, well above the 1.0-2.0% target zone for the Fed.