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Healthcare’s Three Big Tents have Much in Common
Arguably, three trade groups have emerged at the center of healthcare system transformation efforts in the U.S.: the American Hospital Association (AHA), America’s Health Insurance Plans (AHIP) and the Pharmaceutical Research and Manufacturers of America (PhRMA). Others weigh in—the American Medical Association, AdvaMed, the American Public Health Association and others—but this trio is widely regarded as the Big Tents under which policy changes are pursued.
Each plays a unique advocacy role in the system, protecting their members’ turf from unwelcome regulation while fighting against restrictions that might limit their growth opportunities. Their focus is their members:
| AHA | AHIP | PhRMA | |
| Members | 5000 hospitals & 43,000 individual members | 125 Health Insurers | 31 Manufacturers |
| Board Composition | 26 (10 female) | 33 (5 female) | 25 (3 female) |
| Revenues (’22) | $138.8 Mil | $78.6 Mil | $568.3 Mil |
| Revenue chg. ’22 v. ‘21 | +7.7% | -7.1% | -6.7 |
| Margin (’22) | $6.6 Mil | $4.7 Mil | $-0.1% |
| Exec Comp % of ’22 Rev | 8.4% | 9.6% | 3.9% |
| CEO (Tenure) | Richard J. Pollack (since 2015, with AHA 37 yrs.). | Mike Tuffin (since Jan 2024)Prior: SVP UHG, APCO | Stephen J. Ubl (since 2015)Prior: CEO AdvaMed, FAH |
| Direct Lobbying ‘23 | $30.2 Mil | NA | $27.6 Mil |
| Total Industry Lobbying 2023 (includes all sources) | $133.3 Mil | $129.3 Mil | $383.7 Mil |
Sources:*Nonprofit Explorer – ProPublicaIndustries IRS Form 990 for 2022, the latest year available • OpenSecrets based on year-end 2023.
Ironically, these Big Tents have much in common:
- All three serve diverse memberships and are highly protective of their Big Tents. But each faces growing intramural pressure from member cohorts that seek special attention–especially their large and highly profitable members vs. the rest.
- All three struggle with the notions of affordability, price transparency, profit, executive compensation and value. These terms appear frequently in their white papers and comment letters but each tent defines them differently.
- All three depend on physicians to fund member revenues: they’re gatekeepers to member patients, referrals and prescriptions. Each Big Tent is focused on advocacy that enables physician interactions upon which member revenues can be sustainable and service disruption minimal. Thus, physician well-being is a concern to the Big Tents.
- All blame factors outside their control for health costs escalation. The health habits of population, over-regulation and U.S. monetary policy are frequent targets. Projections by the CBO of annual health spending of 5.6% through 2032 are justified by the Big Tents as the net result of increased demand and flaws in the system’s incentives, legals protections and funding mechanisms. Each Big Tent is on the defensive about how they address costs and waste, and how their prices enable increased affordability.
- All three spend heavily to influence lawmakers to avoid unwelcome regulation. Their spending for direct lobbying is multiplied by formal coalitions with friendly trade groups, political action committees, high net worth contributors and corporations. Coalition building is a major function in each Big Tent used against swings in public opinion of concern or against pending legislation that threaten member interests.
- All three serve memberships that operate primarily with business-to-business (B2B) business models primarily. Each subordinates ‘consumerism’ to ‘patients, enrollees, and communities’ served by their members. Maximizing consumer (voter) good will and counter-messaging against hostile media coverage are core functions in each Big Tent.
- All three favor incremental changes to the status quo over transformational reform of the system top to bottom. Wholesale change is unwelcome though the majority of U.S. adults say it’s fundamentally flawed and needs a fresh start.
In each campaign cycle, the Big Tents create playbooks based on possible election outcomes and potential issues they’ll confront. Each identifies possible political appointees to key government posts, committee appointments and legislative staff that with whom they’ll deal. Each reaches out to friendly think-tanks, ex-pats from previous government roles and research organizations to create favorable thought leadership for the talking heads they trust. And each lines up outside lobbyists to augment their staff.
The Boards of the Big Tent trio weigh in, but senior staff in each of the Big Tents drive the organization’s strategy. They’re experienced in advocacy, well-paid and often heavy-handed in dealing with critics.
Operationally, the 3 Big Tents have much in common. Strategically, they’re far apart and the gap appears to be widening. Each blames the other for medical inflation and unnecessary cost. Each alleges the others use unfair business practices to gain market advantages. And each thinks their vision for the future of the U.S. health system is accurate, complete and in the best interest of the public good.
And none of the three has put-forth a vision for the long-term future of the U.S. health system. Protecting the immediate interests of their members against unwelcome regulatory changes is their focus.
P.S. It can be argued that the American Medical Association is the Fourth Big Tent. However, fewer than a fourth of the million active practitioners are AMA members contrasted to the other Big Tents. Like the trio, AMA’s primary advocacy focus is its members: protecting against encroachment by non-physicians, maintenance of clinical autonomy, restrictions on the use of artificial intelligence in patient care and Medicare reimbursement rate changes are major concerns. And, akin to the others, the wider set of issues facing the system i.e. structure, funding, ownership, price transparency, workforce modernization et al. has gotten less attention.
Who is CHA Partners? Here’s what to know about the New Jersey company looking to buy Delco’s Crozer Health
CHA Partners LLC emerged last week as the mystery suitor interested in acquiring Crozer Health and its ailing four-hospital system in Delaware County.
The New Jersey–based real estate firm has a record of buying, stabilizing and selling struggling hospitals, but at least one organization with a history with the company says they’re skeptical about CHA saving health care in Delco.
“It’s really just shocking that both CHA and another community would be interested in going down the same road that we’ve gone [down],” said Paul DiLorenzo, executive director of the Salem Health and Wellness Foundation.
Since its founding in 2008, CHA Partners has acquired and turned around five hospitals in New Jersey. The list includes the Barnert Medical Arts Complex in Paterson, the Greenville Medical Arts Complex in Jersey City, the William B. Kessler Medical Arts Complex in Hammonton and the Muhlenberg Medical Arts Complex in Plainfield.
The fifth and most recent hospital project involved the 2019 acquisition and revival of Salem Medical Center, formerly known as Memorial Hospital of Salem County. The hospital was on the brink of closure after years of a shrinking patient population and aging infrastructure.
“CHA offered to take over the hospital, but needed local support as a part of the initial investment,” DiLorenzo said.
Salem Health and Wellness Foundation, a nonprofit organization that supports public health and social services programs in the community, agreed to step in.
According to court documents, the foundation gave Salem Medical Center and CHA Partners about $39 million in grants and loans to save the local hospital.
CHA Partners sold Salem Medical Center to Inspira Health Network in 2022, but DiLorenzo said the real estate firm still owes the community foundation upwards of $4 million in unpaid loans and legal fees.
The majority of the loan balances were forgiven and the Salem community foundation sued CHA Partners to recoup the rest. They won in court this past May, but DiLorenzo said the foundation has yet to receive any payments.
Now, as the real estate firm moves to acquire another hospital system — Crozer Health in Delco — DiLorenzo said anger “is an understatement.”
“It’s astounding to us that CHA would be negotiating to do that when they’re not doing anything in good faith to pay the bills that are owed to us and to make the people of Salem County whole again,” he said.
CHA Partners declined to comment on its pending deal with Crozer Health or its standing with Salem Health and Wellness Foundation, which was involved with just the single hospital in Salem and not any of the other four New Jersey hospitals that CHA has acquired and stabilized.
CHA recently signed a letter of intent to purchase the hospital system from Crozer Health’s parent company, Prospect Medical Holdings.
The real estate firm would transition the health system from for-profit to nonprofit status, according to Crozer officials who announced the preliminary, nonbinding deal to staff last week. Prospect will work with CHA over the next few months to complete a transfer of ownership, but until then, there are no guarantees of a completed sale.
Prospect and Crozer officials declined to comment specifically on CHA’s history with the hospital in Salem, New Jersey, and the Salem Health and Wellness Foundation. But in an announcement to staff, Crozer leadership described CHA as a company committed to “preserving health care and jobs in the communities it serves” and turning around hospitals, with “each dedicated to providing exceptional care to local residents.”
Following the recent news of a potential new buyer for the Crozer Health system, Pennsylvania state Sen. Tim Kearney released a statement Thursday with concerns about the potential deal.
“The health and well-being of our constituents in Delaware County must be the top priority,” Kearney said. “I am calling on the Attorney General to conduct a thorough analysis of this acquisition. CHA’s track record must be carefully examined to determine if it is indeed a responsible and suitable buyer that will prioritize the health care needs of our community.”
After their experience in Salem County, DiLorenzo echoed those precautions. And while he blames CHA for failing to pay his foundation back, he said this is all a symptom of widespread challenges facing the United States health care industry.
“Poor communities, poor rural communities in particular, are really struggling to make the equation of all this work,” DiLorenzo said. “You have low insurance reimbursement rates, you don’t have the number of people to create a volume, you have health care systems that you know are trying to make the investment in communities, but they can’t make the numbers work. So, this is something that’s bigger than just Salem or just Delaware County.”
Crozer Health is the region’s main EMS provider and home to its primary trauma center and contains the county’s only burn unit. Last October, parent company Prospect Medical Holdings agreed to a deal with the state Attorney General’s Office and the Foundation for Delaware County to sell the distressed hospital system.
In February, the court-approved plan set in motion a 270-day window for Prospect to locate a nonprofit buyer.
WHYY News first reported last month that Prospect had found a potential buyer, but the identity of CHA Partners was not revealed until this past week. Prospect had also asked Pennsylvania officials for $100 million to $500 million in state funds to help finance the deal.
Corporate Takeover Has Not Been Good for Healthcare
| Four decades ago, Paul Starr noted in his landmark history of U.S. healthcare, “The Social Transformation of American Medicine,” that the industry had taken a decisive turn toward corporate ownership. “Medical care in America now appears to be in the early stages of a major transformation in its institutional structure,” he wrote. “Corporations have begun to integrate a hitherto decentralized hospital system, enter a variety of other health care businesses, and consolidate ownership and control in what may eventually become an industry dominated by huge healthcare conglomerates.” Forty years later, Starr’s prediction has come true. The vast majority of hospitals (other than critical access facilities) are now part of health systems, and some of those belong to giant for-profit or not-for-profit corporations. Nearly 80% of physicians are now employed by hospitals or private companies, including health insurers like United Healthcare. Most community pharmacies have been displaced by enormous chains like CVS, Walgreens and Walmart. Nursing home chains have taken over two-thirds of skilled nursing facilities. A handful of huge firms dominate health insurance, and a dozen drug manufacturers produce and set the prices of the most common prescription medicines. Private equity (PE) investors focus like a laser beam on generating profits. There can be an amoral quality to PE investing, seeking returns whether or not they create value for customers in the marketplace. Steward Healthcare, a large hospital chain initially created with PE investment has become, whether fair or not, a poster child for what can go wrong with private investment in healthcare. Steward went bankrupt after aggressively expanding into new markets beyond Massachusetts with funding generated from sales-leaseback arrangements with Real Estate Investment Trusts (REITs). But many of the PE firms that now own over 200 acute care hospitals take a similar approach. According to a recent study of PE-owned hospitals, two years after they were purchased, 61% of them had reduced capital assets, compared to 15.5% of control hospitals. Assets decreased by a mean of 15% for acquired hospitals and increased by 9.2% for controls during that period. Corporate Goals Vs. Value-Based Care The consolidation of the industry by large corporate entities has received a fair amount of media attention. What has been less noticed is the incompatibility between corporate goals and value-based care. One reason for this is that many big healthcare systems pretend to be interested in population health management. For example, they may operate accountable care organizations (ACOs) that seek to improve the quality of care and reduce costs through better prevention and care coordination. They may also try to reduce readmissions, which helps them avoid Medicare penalties. Don’t be fooled. There are exceptions — including the few integrated systems like Kaiser and Geisinger that take financial responsibility for care — but most healthcare systems have no intention of turning their business model upside down by using population health management to decrease admissions and empty their beds. When for-profit chains deliver reports to stock analysts, or not-for-profits seek to sell bonds, the metric they most often use to show their financial health is their occupancy rate, not their success in value-based care. Meanwhile, the healthcare behemoths are continuing to grow larger. While the Department of Justice has ramped up its antitrust activity under the Biden Administration and has discouraged some mergers, this has had relatively little impact on healthcare consolidation. Academic medical centers are acquiring more community hospitals as referral sources, and some large systems like Risant Health, a nonprofit entity created by Kaiser Permanente, are doing interstate deals that help them escape the oversight of state laws. Physicians have been largely a football in the matches between giant healthcare systems and equally massive insurers. Many independent practices have been forced to sell out to hospitals because Medicare pays hospital outpatient departments more than independent practices for the same services. (That this remains the case nearly 10 years after Congress passed its first “site-neutral” payment law is a testament to the power of regulatory capture.) While there are some sizable independent groups and physician-led ACOs, it is difficult for doctors to determine their own destinies today. And, because of how their corporate overlords affect the practice of medicine, many employed physicians are unhappy with their working conditions and its impact on patients. We’re even starting to see the beginnings of unionization in some systems. Saving Primary Care A variety of reforms have been tried to shore up primary care, the cornerstone of value-based care. For example, some primary-care-driven ACOs with value-based contracts generate significant savings that they have shared with their doctors. But the percentage of all payments made in these kinds of arrangements is still fairly small. The risk-taking portion of the healthcare business will not grow substantially as long as hospitals and specialists continue to make good money doing the same old fee-for-service thing. Insurers have also taken the lead in some efforts to fortify primary care. United, which employs about 10% of the nation’s physicians, has been training them to practice evidence-based medicine and reduce waste. Elevance Health recently struck a deal with PE firm Clayton, Dubilier & Rice to create a new primary care model in Elevance’s Millenium Physician Group and Carelon Health. This “whole-person health” model will emphasize the patient-doctor relationship, along with care coordination, referral management and health coaching within “value-based care” financial arrangements. This is all to the good. But health insurers don’t make their profits by encouraging primary care doctors to take better care of patients. They use provider networks, prior authorization, high deductibles and other tools to limit access and the cost of services. In Medicare Advantage, carriers like United and Humana have used diagnostic coding to inflate their Medicare payments by an estimated $88 billion just this year. Efforts to infuse value-based care into healthcare delivery have not been a major priority for insurance companies. Drug Company Profits Whole books have been written about how the pharmaceutical industry has ripped off the American consumer. Following notorious, out-of-whack price increases over the years for drugs like insulin, Humira and Truvada, in 2022 net prices jumped 6.2% for Darzalex, 6% for Prolia, 7.2% for Xgeva, 6% for Perjeta, and 8.9% for Adcetris, among others. These price hikes, which were unsupported by new clinical evidence of the drugs’ effectiveness, netted from $63 million to $248 million in additional revenue for their manufacturers. Drug companies can get away with it because nothing in U.S. law prevents them from raising prices for patented medications by however much they want to. How they price their drugs can also have a strong impact on health costs as a whole, especially when a lot of people take a particular medication. Current examples include Wegovy, Ozempic and the other high-priced GLP-1 weight-loss drugs, which eventually could cost the health system as much as $1 trillion a year — five times as much as could be saved in lower costs for other conditions — if prescribed to all obese Americans. The kicker is that we spend nearly three times as much per person on prescription medicines as other leading countries do, because their governments bargain with pharmaceutical companies and ours doesn’t. Yet the drug makers complain that any limitations on their U.S. profits will make it impossible for them to develop more lifesaving medicines. Overall, it’s clear that the corporatization of our healthcare system is not good for our health. In Portugal, for example, health spending per capita is one-fifth that of the U.S., yet life expectancy there is six years longer, on average, than in our country. The difference is largely rooted in the fact that Portugal has a national health service that guarantees access to healthcare, regardless of ability to pay. In other words, health takes precedence over profits in Portugal. If we really want good healthcare at an affordable cost — the definition of value-based care — we have to move away from our profit-driven, corporatized healthcare model. As long as corporations are allowed to profit from healthcare, they will maximize those profits, regardless of the impact on consumers. It doesn’t matter how much we talk about value-based care or reforms that merely nip at corporate profits. Until Americans demand the same kind of healthcare that every Portuguese has, and insist that our government rein in the corporate owners of healthcare entities, we will get poorer healthcare and die sooner than citizens of other advanced countries. |
| Outcomes Matter. Customers Count. Value Rules. |
What to watch when Medicare releases first negotiated drug prices
The confidential nature of the Biden administration’s drug price negotiations has made the process and outcome of the long-sought Democratic policy goal something of a mystery.
Why it matters:
The administration is expected to announce the results of those negotiations this week, and there’s plenty of speculation about the actual savings that will be realized starting in 2026 — and how aggressive the Biden administration got on pharma in an election year.
Where it stands:
Drugmakers have indicated that the negotiated prices for this first 10 drugs won’t have much impact on their projected bottom lines.
- But the results could hint at what’s to come in subsequent rounds, as the number of drugs up for negotiation expands, possibly to include blockbuster GLP-1 weight-loss drugs.
Context:
The Centers for Medicare and Medicaid Services last summer chose 10 drugs that account for some of the highest total costs for Medicare, including Bristol Myers Squibb and Pfizer’s blood-thinner Eliquis and Boehringer Ingelheim’s diabetes drug Jardiance.
- CMS and drugmakers have been going back and forth since February on how to price the drugs. Meanwhile, the pharmaceutical industry and its allies have mounted a series of so far unsuccessful legal challenges to stop the talks.
Here are some key unanswered questions ahead of the announcement, expected Thursday morning:
What information will CMS release about the final drug prices? Analysts, policy experts and industry groups told Axios they’re watching for whether Medicare officials announce specific levels of savings they achieved on each drug.
- If Medicare does announce levels of savings, it’ll matter whether they measure those against drugs’ current list prices, which are typically higher than what patients actually pay, or another figure that takes into account existing rebates and discounts, said TD Cowen analyst Rick Weissenstein.
- Statutorily, Medicare officials have to release the final prices for the selected drugs by Sept. 1 and justify those prices by March 1.
- “What data CMS chooses to release is a big question mark,” said Chris Meekins, an analyst at Raymond James.
How will pharmacy benefit middlemen and prescription drug insurance plans react to the new prices?
Medicare Part D insurers must cover all 10 selected drugs, but the Inflation Reduction Act doesn’t specify where they need to place the drugs on their formularies.
- That could potentially lead to drug middlemen and insurers giving competing products more favorable placement on their formularies, said Lindsay Bealor Greenleaf, who leads federal and state policy at ADVI Health, which consults for pharmaceutical and biotech manufacturers.
- CMS will require plans to justify their decision if they move the drugs to different tiers or add more restrictive utilization management tools, per KFF.
How will investors and drugmakers react?
The release of the maximum fair drug prices could clarify how risk-averse large pharmaceutical companies need to be in future acquisitions of smaller biotech companies, said John Stanford, executive director of Incubate, the life sciences investor lobbying group.
How will Medicare-negotiated prices compare with international drug prices?
Branded drugs typically come with higher price tags in the United States than elsewhere in the world.
- “I think it’s going to be very instructive to see how much the purchasing power of CMS gets us in terms of reduction,” said Anna Kaltenboeck, who leads the prescription drug reimbursement work at consulting firm ATI Advisory.
What’s next:
Negotiated prices will go into effect Jan 1., 2026. CMS will announce as many as 15 additional drugs for the second round of negotiation by Feb. 1, 2025.
Walgreens considering selling all of its VillageMD business
Walgreens Boots Alliance is considering selling all of its VillageMD primary care clinics, according to a filing with the Securities and Exchange Commission.
The company is evaluating options in light of ongoing investments into VillageMD and its substantial ongoing and expected future cash requirements, Walgreens said in the August 7 filing.
“These options could include a sale of all or part of the VillageMD businesses, possible restructuring options and other strategic opportunities,” Walgreens said.
WHY THIS MATTERS
Walgreens has been facing financial pressure due to a changing retail environment and increased regulatory and reimbursement challenges on the pharmacy end, according to its Q3 earnings report from June.
VillageMD, as well as some other pharmacy clinics, have faced the challenge of making the clinics a scalable solution.
On August 5, Walgreens Boots Alliance stock hit a 52-week low of $10.62, according to Seeking Alpha. Year to date, shares are down about 59%.
In the recent SEC filing, Walgreens acknowledged the existence of defaults under the VillageMD Secured Loan. On January 3, 2023, Walgreens had provided VillageMD senior secured credit facilities in the aggregate amount of $2.25 billion. This consisted of a senior secured term loan in an aggregate principal amount of $1.75 billion and a senior secured credit facility in an aggregate original committed amount of $500 million.
Walgreens is actively engaged in discussions with VillageMD’s stakeholders and other third parties with respect to the future of its investment in VillageMD, it said.
On August 8, Walgreens announced the pricing of an underwritten public offering of senior unsecured notes consisting of $750M aggregate principal amount of 8.125% notes due 2029. The sale of the notes is expected to close on August 12.
WBA said it intends to use the net proceeds from the offering, together with cash on hand, for the repayment and/or retirement of its outstanding 3.800% notes due 2024, and to use any remaining amounts for general corporate purposes.
On August 1, WBA announced it had sold all of its remaining unencumbered shares of Cencora, a drug wholesale company, for $818 million, and, subject to the completion of the sale, a concurrent share repurchase by Cencora in the amount of $250 million.
Proceeds will be used primarily for debt paydown and general corporate purposes, as the company continues to build out a more capital-efficient health services strategy rooted in its retail pharmacy footprint, Walgreens said.
THE LARGER TREND
During the Q3 earnings call on June 27, CEO Tim Wentworth said the company intended to reduce its stake in VillageMD. This was part of a strategy announced earlier in the year to close unprofitable VillageMD clinics in order to cut $1 billion in costs.
Walgreens also announced at that time plans to shutter up to 25% of its retail stores that were unprofitable.
Kaiser Permanente reports $908M in Q2 operating income
Kaiser Permanente showed year-to-year financial improvement in Q2, reporting an operating income of $908 million (up from $741 million in Q2 2023), and an operating margin of 3.1% (up from 2.9% a year ago).
The news comes months after Kaiser Foundation Health plan reported a data breach affecting over 13 million people. Certain online technologies, previously installed on its websites and mobile applications, may have transmitted personal information to third-party vendors Google, Microsoft Bing and X (Twitter) when members and patients accessed its websites or mobile applications, the health system said in April.
Despite that hardship, Kaiser Foundation Health Plan, Kaiser Foundation Hospitals and assorted subsidiaries and affiliates reported operating revenues of $29.1 billion and operating expenses of $28.2 billion, compared to operating revenues of $25.2 billion and operating expenses of $24.4 billion in the same period last year.
According to Kaiser, favorable financial market conditions drove other income (net of other expense) of $1.2 billion in the second quarter of 2024. Other income Q2 2023 was $1.3 billion. For the second quarter of 2024, net income was $2.1 billion, identical to last year.
Kaiser’s financial results in the second quarter include Geisinger, which joined subsidiary Risant Health on March 31.
WHAT’S THE IMPACT?
Kaiser said that it typically experiences higher operating margins in the first half of the year due to the annual enrollment cycle. Lower operating margins in the second half of the year are not uncommon, because expenses usually increase, in part due to the impact of seasonal care, while revenues stay relatively flat.
Kaiser Permanente membership was more than 12.5 million as of June 30, while membership for Risant Health affiliates was nearly 552,000.
Capital spending in the second quarter was $889 million, compared to $824 million in the same period of the prior year, as the organization continued to invest strategically in facilities and technology.
Though Kaiser logged a strong Q2, in May it announced plans to sell up to $3.5 billion of holdings in private-equity funds due to cash constraints, according to unnamed sources in The Wall Street Journal. Kaiser is reportedly working with investment bank Jefferies Financial Group to offload up to $3.5 billion of stakes to secondary buyers.
However, a Kaiser spokesman said at the time, “None of our decisions have been driven by liquidity needs; we maintain liquidity that is appropriate for a AA- rated organization. We will continue to make prudent, thoughtful investment decisions.”
THE LARGER TREND
Kaiser’s Q1 financial results showed operating income of $935 million, compared to $233 million for Q1 2023.
In March, Kaiser Permanente and Town Hall Ventures said they would be launching an organization called Habitat Health, which is designed to help older adults overcome the challenges of aging at home. Operating as a Program of All-Inclusive Care for the Elderly, Habitat Health is designed to help participants live independently in their homes, with comprehensive care the companies say will lead to better health outcomes.
Habitat Health plans to begin serving older adults in Sacramento and Los Angeles in 2025, and will aim to keep low-income participants in their homes to receive personalized support.
Inflation can take the back seat
For more than two years, the economy’s big problem was inflation — it was the key irritant for policymakers, the White House and American consumers.
- Today’s Consumer Price Index report confirms that is no longer the case: Prices are no longer rising rapidly, which means the battle to kill inflation appears all but over.
Why it matters:
Inflation looked to be coming down alongside a still-flourishing economy — until recently. The string of upbeat inflation data is all but certain to allow Fed officials to more comfortably shift their attention to the weakening labor market and lower interest rates.
What they’re saying:
“[T]he cumulative improvement in the overall inflation data over the past year now gives the Federal Reserve cover to move into risk management mode with the intent of protecting and preserving the soft landing,” Joe Brusuelas, chief economist at accounting firm RSM, wrote today.
By the numbers:
Overall CPI rose 2.9% in the 12 months ending in July, dropping below 3% for the first time since 2021.
- Core CPI, which excludes food and energy prices, rose 3.2% — the smallest increase in three years.
- By a different measure, inflation looks more benign. Over the last three months, core CPI rose 1.6% on an annualized basis, down from 2.1% in June.
Zoom in:
Prices for many key items increased more slowly — or, in some cases, got cheaper over the month.
- Grocery costs have been rising at a mild pace since February, including a 0.1% increase in July. Prices are up just 1% compared to the same time last year.
- Used vehicle costs fell 2.3% in July, a bigger drop than that seen the previous month. New vehicle prices fell 0.2%, the sixth-straight month of price decreases.
The intrigue:
The bad news was in the housing sector, where prices have kept upward pressure on inflation.
- The shelter index is a huge component. It accounted for over 70% of core CPI’s 12-month increase through July, the government said.
- The sector is “solely responsible for core inflation remaining above the Fed’s 2% target,” Preston Caldwell, senior U.S. economist at Morningstar, wrote today.
In the CPI report, the rent index rose 0.5%, up from 0.3%. Owner’s equivalent rent, which the government uses to account for inflation in homes that people own, rose 0.4% after slowing in June.
What to watch:
The question in recent weeks has been how drastic of a cut the Fed will make at the conclusion of its next policy meeting in September — rather than whether it will do so at all.
- The odds that the Fed would cut by a quarter of a percentage point rose to 54% after the inflation report, according to CME’s FedWatch tool.
- As of yesterday, odds of a half-percentage point cut looked slightly more likely.
The bottom line:
The incoming data about the health of the labor market will ultimately determine that call.
- “This is now a labor data-first Fed, not an inflation data-first Fed, and the incoming labor data will determine how aggressively the Fed pulls forward rate cuts,” economists at Evercore wrote in a note this morning.
HENRY KOTULA 