The strange case of US medical costs

If Mr. Obama's is going to succeed in reforming US healthcare, he is going to have to do something about medical inflation. Since 1970, health care costs have increased almost 12 fold. During the same period, the US CPI increased 5 times.

Healthcare inflation also tells us something about the true nature of US inflation. Medical care is essentially a non traded good. As you can see from the chart, healthcare costs departed from the CPI around 1990, just as China began to industrialize and flood the US with cheap consumer goods. Therefore, the headline CPI was hiding very rapid inflation in sectors such as health.

Healthcare is now unaffordable for millions of Americans. The reason is a simple one. US suffered from a concealed and barely understood inflationary surge, which the Fed accommodated with low interest rates.