Retail Pharmacy Sales Trends Show Much Higher Price Increases Than the CPI Indicates

Commentary

Walgreens Boots Alliance (Walgreens), the publicly listed, “integrated healthcare, pharmacy and retail” company, just announced its annual and fourth quarter financial results. The details provide a further clue as to just how disconnected the Bureau of Labor Statistics’ (BLS) Consumer Price Index (CPI) statistics appear from the real-world inflation ravaging American households.

Walgreens reported that comparable U.S. pharmacy sales were up 11.7 percent for the quarter, while comparable U.S. prescriptions filled were up only 2.5 percent. This implies that Walgreens was able to increase price by as much as 9.2 percent in the quarter, assuming limited effects of product mix shift. At the same, time, according to the BLS, CPI prescription drug prices were up an average of only 2.2 percent in the same period.

For background, I wrote last year that there was “increasing evidence to support the suspicion that CPI does not represent the actual inflation that Americans face.” The article illustrated several industry sectors, including education, medical care, housing, electricity, and food, for which private sector data belied the CPI numbers and pointed to much higher inflation.

Based on an analysis of Walgreens’s sales results over the past three years, the rise in prescription drug prices may prove to be another example of CPI substantially understating the price inflation that American consumers face each day.

According to the BLS, prescription drug inflation has averaged only 2.2 percent since January 2022. This is nearly 60 percent lower than overall inflation (headline CPI), which has averaged 5.2 percent during this period. While headline CPI has ranged from as high as 9.1 percent in June 2022 to a low of 2.4 percent in September 2024, prescription drug prices, according to BLS data, have inflated in a narrow band, between 0.3 percent and 3.8 percent depending on the month. This is notable given that the U.S. imports the majority of its pharmaceutical products from countries including Ireland, Germany, Switzerland, and China. In 2022, China accounted for nearly 8 percent of “drugs dosed and ready for use by American consumers and hospitals,” up from 1 percent in 2020. With the dollar strengthening by over 10 percent since 2021, these products should have become—all else equal—less expensive in dollar terms, not more.

But the real mystery is, why does inflation in prescription drugs appear so much lower in the CPI data than it does in retailers’ sales results? Walgreens illustrates the point.

For Walgreens, comparable U.S. pharmacy sales have grown at an average of 7.3 percent since the end of 2021. Cumulatively, this implies a three-year comparable sales growth of 26 percent. Sales increases come only three ways: more transactions, mix shift into higher-value products, or higher prices. Walgreens’s growth in comparable number of prescriptions filled (i.e., transactions) has been essentially flat, averaging less than 1 percent. Assuming that the type of drug ordered by the average Walgreens customer hasn’t changed that much, then the vast majority of Walgreens’s U.S. pharmacy sales increase has come from price increases. Walgreens has repeatedly noted in its quarterly earnings releases that sales are “benefiting from higher branded drug inflation.” If there has been no mix shift (there may have been some), then prescription drug price inflation has averaged 6.4 percent over three years, or 26 percent in total. This is more than 4 percent higher per year than what the CPI implies for average prescription drug inflation (2.2. percent).

What the retailer is collecting at the pharmacy counter may not reflect the ultimate price paid by the consumer. For example, the Inflation Reduction Act requires pharma companies to rebate Medicare when drug prices increase faster than the rate of inflation. In this case, the retailer is benefiting at the cost of the U.S. taxpayer. How this and other adjustments get incorporated, if at all, into the black box of CPI is anyone’s guess.

One of the BLS’s favorite tools to modify the CPI data is so-called “hedonic quality adjustments.” This magic wand allows the CPI to adjust for “changing product quality within some CPI item samples,” or to swap out one product for another, less expensive item in the index. This is a completely subjective exercise that allows the model—and implied inflation—to be massaged downward at will.

A rummage through the details of Walgreens’s financial results provides an anecdotal, not comprehensive or clinical, view of the loss of consumer purchasing power resulting from inflation. It is flawed (e.g., unknown mix shift) and would not stand in a court of law. Nonetheless, it is yet another of many confirmations of what Americans know intuitively. All is not as it appears in the CPI, and inflation continues to run hotter than officially reported.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.

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