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LTCI Watch: Inflation

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Investors throughout the world love U.S. bonds. They will keep pouring money into the U.S. economy forever, in ways that will make it easy for the U.S. Treasury to borrow at rates near 0%, and let the Federal Reserve Board keep big banks afloat by printing money without causing prices to rise.

That drought in the Midwest is a bit creepy, but, hey, too much red meat is bad for you, anyway! We’ll just eat more chicken. Maybe a little goat.

Gas prices rising? Got to love those hybrids.

Long-term care (LTC)? Why should LTC prices rise when the real estate market is so soft and there’s always another chronically unemployed individual desperate for any type of work whatsoever, even working as a self-trained home health aide, if the immigration authorities catch and deport the last one.

Buy a 5% compound annual long-term care insurance (LTCI) inflation protection rider? Well, the riders have gotten expensive, and some insurers have stopped selling them. The insurers are encouraging consumers to simply buy more coverage, or buy coverage with riders will let them buy more coverage later without undergoing new medical underwriting.

Er … wait. The LTCI carriers are pulling away from selling 5% annual compound inflation protection. If they are selling it, they’re charging quite a bit more.

My sense is that the portfolio managers at life and health insurers are smart people. They seem to clue anyone who reads the forecasts they give at industry events in to problems such as the U.S. real estate bubble at least two years before the  cataclysmic headlines show up on the front page of The New York Times.

If life insurers are scared to sell LTCI coverage with 5% compound inflation protection, that is, obviously, partly due to the ultra-low interest rate environment. But I think it might also be a sobering leading economic indicator about what might be happening to consumer prices and LTC prices 2 years from now.

Maybe the take-home message is that consumers who have any ability to find and pay for 5% annual compound inflation protection should jump to do so now, while the getting’s good.

Actual prices for U.S. LTC services have been pretty flat for the past few years, but the prices are still sky-high, and one longtime LTCI market watcher told us he thinks the long-term average is somewhere between 2% and 4%. He said anyone buying LTCI coverage with less than 3% annual compound inflation protection might be asking for trouble.

I think there are also signs in the wider world that inflation could be starting to yawn and rub its scary red eyes.

Just look, for example, at the analyst reports on the Web site of J.P. Morgan Securities L.L.C.  The analysts there have comments on inflation popping up in India, Hong Kong and mainland China. The Wall Street Journal has a story about Hungary refraining from cutting its interest rates because of concerns about accelerating inflation. The International Monetary Fund is telling Singapore to, hey, allow a little inflation — “It won’t hurt you, Singapore, really it won’t. Trust us!” — to cope with a low unemployment rate. A website in Argentina is reporting that consumer prices there are really up more than 17% so far this year.

So, I don’t think inflation has really gone anyhere. It’s still there, snoozing, waiting to wake up and bite people planning for future LTC costs on the tender parts.