Inflation Jumps, Propelled by War-Driven Energy Costs

As expected, inflation was sharply higher in March than in prior months. The overall inflation rate for March was 1.3 percent, although inflation in the core index was just 0.2 percent. This brought the year-over-year rates in the overall index to 3.3 percent, and in the core index to 2.6 percent.

The jump in war-related inflation was expected, but it is important to note that inflation was already on an upswing even before the war started. The Personal Consumption Expenditure deflator (PCE) for February rose by 0.4 percent, as did the core PCE. Year-over-year inflation in the PCE was 2.8 percent overall and 3.0 percent in the core index.

The acceleration was clear in the annualized rate for the last three months. In the overall index it was 4.1 percent, while in the core index it was 4.4 percent. It is important to remember that inflation had been headed lower throughout 2023 and 2024. Most analysts expected the inflation rate to hit the Fed’s 2.0 percent target in 2025 or at least be very close to it.

As the first inflation data since the start of the war, the March CPI showed inflation is accelerating even further. The annualized rate in the overall CPI over the last three months was 5.3 percent. It was 2.9 percent in the core index.

Inflation in the core index was held down by some likely anomalous readings. The health insurance index, which accounts for just over 1.0 percent of the core index, fell by 1.4 percent in March. This index, which measures the operating costs and profits of insurers, is unlikely to keep falling.

The auto insurance index, which accounts for 3.4 percent of the core index, was flat in March. This index had been rising at double-digit rates from 2022 to 2024, but has risen just 0.8 percent over the last year.

There also appears to have been a sharp fall in the legal services index. While the sample was too small to post the index itself, it led to a March decline of 1.2 percent in the “miscellaneous personal services” index, which accounts for 1.2 percent of the core CPI. The prices rose for all the listed items in this category, except for the tiny non-laundry apparel services category, where prices fell 0.2 percent. Anyhow, this will likely not be repeated.

It seems inflation was accelerating even before the war. The surge in oil prices added fuel to the fire, but inflation will likely be well above the Fed’s 2.0 percent target for the foreseeable future, even if the ceasefire lasts and oil begins flowing through the Strait of Hormuz in the near future.

Individualized Medicine: Pay for the Research Upfront

The New York Times had an interesting column by Jeff Coller, the director of the RNA Innovation Center at Johns Hopkins University, on the promise of individualized medicine for treating rare diseases. The piece points out that while specific “rare” diseases are by definition rare, collectively they are not. It reports that 25 million people in this country have some form of genetic disorder. By Coller’s account, the medical costs from these diseases come to over $400 billion a year (1.3 percent of GDP or 40 percent of the military budget) in addition to the cost they impose on the patients’ lives.

The gist of Coller’s piece is that the normal structure of the FDA approval process for traditional drugs is not appropriate for the sort of gene editing that is being developed to treat these rare diseases. It is not really possible to have large-scale clinical trials to establish safety and effectiveness. As an alternative, Coller suggests a process whereby the FDA would establish accreditation to an institution or group of doctors that effectively follow procedures to treat conditions.

While this approach sounds promising, it is also worth commenting on the funding side of the equation. Coller’s point that the traditional regulatory process for approving drugs is not appropriate for these individualized treatments also applies to the patent-monopoly financing model for their development. Relying on patents could lead to an absurd situation where a researcher or company holds a patent on a treatment that may literally apply to just one patient.

Rather than try to recoup costs through this route, it would make far more sense to allocate funding to develop the technology, which then can be used at no cost, other than the direct cost to pay the doctors and other healthcare professionals involved in administering the treatment. This would also have the benefit that all the research can be made freely available to other researchers, since that could be a condition of the funding.

I have harped on this point endlessly, since government-granted patent monopolies both create the artificial problem of high prices and are a recipe for corruption in the pharmaceutical industry. It would be great to get more examples of the effectiveness of upfront funding of research.

This first appeared on Dean Baker’s Beat the Press blog.

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