Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Cracking the Healthcare Inflation Model
Transcript
- Lucas: So we talk a lot about how stagflation is hitting consumers at the grocery store and the gas pump. But there's one category where the price increases are actually accelerating, even as the rest of the economy slows down. Luna: Let me guess: healthcare. Lucas: Exactly. The April CPI reading came in at 332.4 — that's up about 0.6 percent from March. But medical care services? That sub-index rose nearly double that pace. And it's not a one-month blip. Luna: I've been seeing my own health plan renewal notices. The premium increase this year was north of 8 percent. And my employer is self-insured, so it's not just an insurance company being greedy. Lucas: Right. That's the structural story. Healthcare inflation has its own logic, separate from the business cycle. In a normal recession, overall inflation drops because demand falls. But healthcare demand is largely non-discretionary. When people get sick, they still go to the doctor. And providers have a lot of pricing power because patients don't comparison-shop for an appendectomy. Luna: But there's another layer here. Hospital labor costs have become much more rigid. During the pandemic, a lot of nurses and techs left the field. Now hospitals have to pay more to attract them, and those wages aren't coming back down. Lucas: That's the key structural change. The unemployment rate is 4.3 percent — low by historical standards — but healthcare job openings remain elevated. The JOLTS data from March showed about 6.86 million total openings, but healthcare and social assistance accounted for a disproportionate share. Hospitals are competing with each other for a limited pool of workers. Luna: And those labor costs get baked into contracted rates with insurers, which then flow into premiums. So you have this feedback loop that's largely immune to the Federal Reserve's interest rate moves. Lucas: Let's put a number on it. According to the Kaiser Family Foundation, average family health insurance premiums rose 7 percent in 2025 — that's about $25,000 a year. Early data for 2026 suggests we're tracking toward another 7 to 9 percent increase. Meanwhile, overall inflation is running around 4 percent. So healthcare is outpacing the general price level by a wide margin. Luna: And that's where the stagflation angle gets really interesting. Normally, when the economy slows, companies lose pricing power. But hospital systems are seeing demand hold up because people can't defer cancer treatment or a heart condition. At the same time, their input costs — labor, supplies, even energy for running facilities — keep rising. Lucas: You're describing a cost-push inflation that's specific to healthcare. And it's compounded by the fact that many hospitals are still operating on thin margins. The American Hospital Association reported that the average hospital margin was about 3 percent in 2025. So when costs go up, they have to pass them through almost dollar for dollar. Luna: One thing I've noticed is the shift toward outpatient care. More procedures are being done in ambulatory surgery centers or even doctor's offices. That should be cheaper, but it's not showing up in the CPI data as a moderating force. Why? Lucas: Great question. Part of it is that the CPI for medical care is a mix of different things — hospital services, professional services, prescription drugs. The outpatient shift is real, but it's happening slowly. And in the meantime, the pricing power for those outpatient facilities is actually quite high. They're often owned by private equity or large health systems that can negotiate favorable rates with insurers. Luna: So healthcare inflation becomes a kind of floor under overall inflation. Even if goods prices come down — and we've seen some moderation in used cars and apparel — services inflation remains sticky. Lucas: That's the stagflationary pattern. The economy grows at around 2 percent real GDP, which is fine but not booming. Inflation stays above target. And healthcare is one of the main reasons the Fed can't declare victory. The core CPI ex food and energy was 335.4 in April. That's still running north of 3 percent annualized. Luna: And if you look at the 10-year breakeven inflation rate, it's at 2.40 percent. That's the market's expectation for average inflation over the next decade. It's come down from the peak, but it's still above the Fed's 2 percent target. Lucas: Which brings us back to the bond market. We talked about bond vigilantes in episode 2. But the healthcare piece is actually a more fundamental driver because it's about demographic and structural forces, not just market sentiment. Luna: There's also the policy angle. The current administration has been pushing for more price transparency in healthcare. But that's a slow-moving lever. And with the Iran war rattling energy markets, the government has other priorities. Lucas: Yeah, that CNBC headline about Putin and Xi reviving a gas pipeline shows just how geopolitically complicated things are. But healthcare is a domestic issue that doesn't get the same attention as oil prices or trade policy. Luna: So what's the takeaway for a listener who's trying to make sense of their own budget? If their health insurance premiums are going up 8 percent, but their salary is only rising 3 or 4 percent, they're getting squeezed. Lucas: That's the micro-level stagflation story. And it's not going away anytime soon. The average hourly earnings number came in at $37.40 for April, up about 3.5 percent year-over-year. That's decent, but it's being outpaced by healthcare costs. So real purchasing power in that category is actually declining. Luna: And if we go back to the 1970s echo — which we've touched on in previous episodes — healthcare was a much smaller part of the economy back then. In 1970, health spending was about 7 percent of GDP. Now it's pushing 20 percent. So the inflationary impact is much larger today. Lucas: That's a really important distinction. The stagflation of the 1970s was largely about oil shocks and food prices. Today's version has a healthcare component that didn't exist in the same way. So the policy responses that worked then — like deregulation or monetary tightening — might not be as effective now. Luna: If walking through the economy with us has made something click — maybe it's understanding why your health plan costs so much, or how a number like CPI affects your daily life — a couple of dollars a month is genuinely what keeps these conversations going. You can find that at buy me a coffee dot com slash fexingo. It's a small thing that makes a real difference. Lucas: Yeah, honestly, it's what keeps us ad-free and focused on the numbers that actually matter. So if you've gotten something out of this, we'd appreciate it. Luna: Now, back to that feedback loop we were talking about. One thing I've been tracking is how hospital systems are responding to the labor shortage. They're investing in automation — things like robotic surgery, ai driven scheduling, even autonomous cleaning robots. That might help contain costs in the long run, but the upfront investment is huge. Lucas: And that investment shows up in the capital expenditure data. In Q1 2026, nonresidential fixed investment in health care structures was up, but equipment spending was flat. So hospitals are being cautious. They're not going on a building spree. They're trying to do more with the same physical footprint. Luna: Which brings us to an interesting paradox: In a stagflationary environment, healthcare is both a problem and a source of stability. It keeps inflation high, but it also provides steady employment and demand. The healthcare sector added about 50,000 jobs in April, according to the payrolls report. That's a significant chunk. Lucas: It's one of the few sectors where hiring hasn't slowed despite the economic uncertainty. Nonfarm payrolls overall were up 115,000 in April, so healthcare accounted for almost half of that. That's a stabilizing force, but it also means the sector is absorbing labor that could be going to other parts of the economy. Luna: So where does this leave us? If you're an investor, should you be looking at healthcare stocks as a stagflation hedge? Lucas: It's tempting, but you have to be selective. Big pharma companies with pricing power and drug portfolios have done well. But hospital operators are facing margin pressure. And insurers are caught between rising costs and regulatory caps on premium increases. So it's not a blanket 'buy healthcare' call. Luna: And from a policy perspective? Is there anything the Fed can do about healthcare inflation? Lucas: Not directly. The Fed's tools are blunt — interest rates affect demand across the economy. But healthcare demand is inelastic. So tighter monetary policy might slow wage growth in other sectors, but it won't do much to moderate hospital labor costs. That's why you see the Fed focusing on inflation expectations, which are partly driven by healthcare costs. Luna: So we're left with a structural problem that requires legislative or regulatory solutions. Price transparency, site-neutral payments — these are the kinds of reforms that could bend the curve. But they're politically difficult. Lucas: And slow. Even if Congress passed something tomorrow, it would take years to see the effect. Meanwhile, the CPI keeps ticking up. That's the frustrating reality of healthcare in a stagflation economy. Luna: One last thought: We've been talking about the US, but this is a global phenomenon. The ECB is dealing with similar pressures. The Bank of France governor was just on CNBC saying they'll 'do what is necessary' to tame inflation. Healthcare costs are rising in Europe too, though their systems are different. Lucas: Right. In single-payer systems, the government has more direct control over prices. But they also face the same labor shortages and supply chain issues. So no country is immune. The question is which ones can manage the trade-offs better. Luna: And for the average person, the takeaway is: Don't expect healthcare inflation to ease up anytime soon. Plan your budget accordingly. Lucas: That's the kind of concrete advice that matters. On that note, I think we've covered a lot of ground. Next episode, we'll look at another sector that's quietly reshaping the inflation picture.