Sectoral Micro-Inflation Hints At Future Trends: Goldman Sachs

Sectoral Micro-Inflation Hints At Future Trends: Goldman Sachs

The US Weekly Kickstart from Goldman Sachs Portfolio Strategy Research published on Friday, August 1st, notes that even though overall inflation is still relatively tame, several consumer-facing sectors, such as housing and healthcare, are currently seeing significant inflationary pressures.

Inflation has been a topic of concern for some time now, with both economists and analysts expecting the improving economy to begin to lead to labor pressures and price increases. To date, however, overall inflation has not been significant as the economic recovery has been slow and gradual. Food prices have been increasing relatively rapidly over the last few months, but economists say that is more related to weather and harvest factors than economics.

Micro-inflation – CPI vs PCE

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The Goldman report noted that the Fed’s preferred measure of inflation, core PCE, moved up from 1.2% in January 2014 to 1.5% in June. On the other hand, core CPI inflation currently up 1.9% year over year. GS analysts David J. Kostin and colleagues sum up their perspective on near-term inflation. “Our economists expect inflation will remain subdued and believe the first rate hike is 12 months away, in 3Q 2015.”


The analysts also point out the difference between CPI and PCE is because of the weighting of the components in the indices. CPI has a more heavily weighted housing companent  — 49% of core CPI vs. 24% of core PCE) — and health care has a 14% larger weight in PCE — 24%compared with 10% for CPI.

Rent micro-inflation


Kostin et al point out that increasing rents remain a micro-inflation hotspot. Goldman Sachs track same-store revenue growth across a universe of 300,000 apartment units owned by major residential real estate management firms. The CPI survey only tracks around 40,000 apartment units.

The GS analysts note that apartment REIT revenue growth has tended forecast the housing components of CPI and PCE. They also note: “REIT rent growth has slowed from 6% to 4% during the last 12 months but our analysts forecast a reacceleration to 6% in 2015. Company guidance ranges from 5% for AIV and AVB to 10% for ESS.”

Micro-inflation – Medical cost inflation

While the Affordable Care Act (ACA) and other measures have helped slow health care inflation, it will take major efforts by employers, insurers and government agencies to implement effective cost-controls and promote more efficient care in order to limit health care inflation. The PwC Health Research Institute projects a 6.8% increase in medical costs in 2015, with an average increase of 7.5% for health insurance plans sold through the ACA.

Drug costs are another area of micro-inflation. Kostin and colleagues note that Express-Scripts forecasts annual pharmaceutical price inflation of around 7% over the next three years, with specialty drugs expected to be up by 18%.

It should be noted, however, that pharmaceuticals only represent 21% of medical inflation.

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