Surge in medical care prices is a dilemma for the Fed

The big gap that has opened up between the CPI and PCE measures of core price inflation is now largely due to just one category, medical care. The Fed's preferred PCE measure of core inflation is still being depressed by declines in the administered prices set by Congress for Medicare and Medicaid. In contrast, the CPI measure, which covers only households' out-of-pocket health spending, shows medical care inflation accelerating in a quite alarming manner.