(Bloomberg) — For Federal Reserve Chair Janet Yellen, the current too-low inflation rate is not only “transitory,” it’s also “idiosyncratic.”
Aside from the plunge in oil, the head of the central bank this month chose to highlight two culprits for the subdued price environment — medical care and non-market prices — which combined account for about 24 percent of the Fed’s preferred inflation measure. By choosing to focus on two such quirky components, Yellen showed she and most of her colleagues remain confident the unhealthy lack of inflation is only temporary.
Officials this month were so sure prices would eventually rise closer to their 2 percent goal that they raised the benchmark interest rate so they wouldn’t have to tighten too quickly once inflation did flare.
See also: Fed birdcage: New voters, new grades for FOMC in 2016
“There are various idiosyncratic factors that affect core inflation,” Yellen said at a Dec. 16 press conference. “But I personally don’t think we’re in a world where inflation is being determined in a different way than it has historically.”
At least for medical expenses, Yellen is probably onto something.
Those costs, which alone make up almost 17 percent of the personal consumption expenditures (PCE) price index that is tracked by the central bank, rose just 0.9 percent in November from a year earlier. That goes a long way to explain why the core price measure, which excludes food and fuel, climbed only 1.3 percent in the past 12 months.
So what’s to blame for the slower health-care inflation in 2015? Two years of government increases in reimbursement rates to physicians for Medicaid services, which tend to leak into what the private market charges, expired at the start of the year, said Omair Sharif, rates sales strategist at SG Americas Securities LLC in New York.
Policy makers are “looking through that kind of stuff because they know that these are sort of one-off legislative changes,” Sharif said. “Inflation should move higher because these things will be less of a drag going forward.”
Economists at Goldman Sachs Group Inc. in New York also wrote last month that they expect medical-care costs to rise early in 2016, in part as the year-over-year comparisons become more favorable and also because of more wage growth in health-care jobs.