Will the ACA drive up the costs of goods (inflation) and hence nominal interest rates? I’m concerned that it will. Frankly, I’m concerned that they will go up anyway, but that ACA could be the trigger.
I commented about it on Ed Cone’s thread about Hagan/ACA and part of his reply was “and our ongoing low-inflation/low-interest-rate era, and the possibility that reform will slow healthcare cost inflation.”
Maybe I’m wrong, but I think we’re at the bottom of historically low interest rates/inflation. What if ACA marks the end of low-interest rates?
I entered the real estate market in 1991 when the Prime Rate was in the 8’s and 9’s. The 10-year treasury was around 8. I’ve watched Prime and Treasuries bump around. It’s my belief that treasuries are at an all time low and anyone who isn’t locking their rates is gambling. I believe the Prime Rate could increase from 3.25 to 5.5-8% in the next three years.
Likewise, I’m concerned that 10-year treasuries could reach 6-8% over the next few years.
The one-year CMT gives us an indication of the historically low rates:
Inflation. I’m concerned that ACA will result in higher cost of goods sold and inflation. I’ve heard business owners talking about the additional costs they will incur by having to provide health insurance. I’ve also seen estimates and had discussions about premiums going up (which would likely have to in order to cover those with preexisting conditions). I believe those costs will be passed on to consumers in the form of higher prices. A jump in prices means inflation. A rate of 3-5% inflation is not out of the question – we only need to look back to 2007 to find 4% inflation or 1990 for 6%. ACA advocates argue that health care costs (which account for 7% of the CPI weight) will decrease, but I haven’t seen any indication of that in the real world.
CPI only looks at consumer paid health care costs, not employee paid. Per BLS CPI Notes – “Since medical care only includes consumers’ out-of-pocket expenditures (and excludes employer provided health care), its share in the CPI is smaller than its share of gross domestic product (GDP) and other national accounts measures.”
It may make CPI for medical costs look good, but shifting dollars around from the consumers to their employers, medical providers or government – doesn’t make the cost magically disappear. Those costs will reappear in other areas.
Interest Rates. With inflation comes higher nominal interest rates as they are the sum of the real interest rate and inflation. I’m concerned that interest rates will rise over the next few years. As interest rates rise, the cost of products and services will rise as well. That leads to even higher inflation.
Stock Market Adjustment? A high interest rate environment would have devastating effects on the economy and stock market. I’m a bear anyway, but I believe a shift in interest rates could topple the market highs.
In summary, I’m concerned that ACA will increase the cost of goods, drive up inflation, and increase interest rates.
What are your thoughts? The comments section is at the bottom of the page.