by Jade Thomason
Equity and Fixed Income Trader
The economic data released month after month follows a rhythm we have become quite accustomed to, and the Consumer Price Index (CPI) release is an integral part of this familiar cadence. July’s CPI report showed U.S. inflation rose 3.2% in July from a year earlier. This was the first time in 13 months that the rate increased compared to the prior month, but it was calculated from a lower base after prices subsided last July. This was expected, and it is unlikely this will lead to another rate hike by the Fed. As inflation remains top of mind, it is important to look back on what steps were taken to alleviate the pressures felt by consumers. While inflation is a very broad topic, focus was placed on healthcare costs due to their undeniable impact on the budgets and well-being of Americans.
Since 2021, prices for many goods and services increased faster than usual, and in 2022, overall inflation reached its highest level in more than 40 years. The Inflation Reduction Act of 2022 was introduced to curb inflation and reduce the budget deficit through several provisions, one being healthcare-related costs. At the household level, healthcare spending continues to be a significant financial concern and accounts for 16% of personal spend. This law seeks to put an inflation cap on drug prices and lower prescription costs by allowing Medicare to negotiate with drug companies. The “negotiation-eligible” drugs will be those with the highest total Medicare spend. The implementation timeline of the prescription drug provisions begins in 2026 with 10 drugs, and each year, through 2029, additional drugs will be subject to a price reduction. Next month we will get a glimpse of the impact when the first 10 drugs selected for negotiation will be published.
Why is this important? Based on the chart below, prices for medical care typically outpace growth in the rest of the economy, so any relief in this area will be well received.
Source: KFF analysis of Bureau of Labor Statistics CPI Data
Healthcare costs have always been somewhat of a “black box”, so this will only increase transparency in this industry. In addition to these “negotiation-eligible” drugs, every drug manufacturer is required to pay a rebate if drug prices increase faster than the rate of inflation. Savings from both provisions will lower the out-of-pocket costs to consumers. However, less than 10% of the total healthcare spend is attributed to prescription drugs. To truly tackle healthcare spending, other areas such as physician services and hospital care may be necessary to dissect.
Reducing inflation to the Federal Reserve’s 2% target is expected to be a much slower process, and it will take time to see the effects of this provision, along with the other mechanisms used to fight inflation.
Takeaways for the Week
July CPI was in line with expectations – headline CPI advanced 3.2% from a year ago, inching closer to the Federal Reserve’s 2% target.
The conclusion of Q2 2023 earnings season is in sight - 90% of S&P 500 companies have reported, with the majority beating analysts’ earnings expectations.