While some blame for the jump in consumer inflation can be attributed to world oil prices and climatic influences on food prices, we have many home-grown sources of inflation.

Over the first eight years of this century, the average annual growth in the CPI has been 3.3%, but the health group has been running at 5.0% a year.

A dissection of this figure hints at the causes. Hospital and medical services have been rising at 5.9% a year. Much of this comes from private insurance, which has been rising at 6.4% a year since 2001, wiping out most of the benefit of the 30% rebate.

This trend is entrenched. Michael Armitage, CEO of the Australian Health Insurance Association, explained the problem in an interview on the ABC Breakfast program, when he was defending the insurers’ claims for price increases:

They are going to be faced with a huge tsunami of costs for the ensuing twelve months, over which they have no control. They have to go to their fund members and say “we need more money”.

The rise in hospital and medical services is offset by more modest price rises in optical services and pharmaceuticals – 2.2% and 2.8% respectively. That is, they have been lower than inflation generally.

Optical services are subject to high rates of bulk billing. Prescription pharmaceutical co-payments (which are used in the CPI) are set by the Commonwealth; they are not left to the forces of a market distorted in favour of producers.

These figures carry a message for a Treasurer concerned with an inflation problem. As US experience shows, and as we are now learning, private insurance is a major driver of health care inflation. A government can contain health care inflation either through development of competitive markets or through strong interventions involving price control; the choice rests, in part, on the government’s ideology.

Private insurance fits neither model: in providing services which are free or heavily subsidized at the time of delivery it muzzles those price signals which control demand in normal markets. The notion “HCF/BUPA/NIB will pay for it” carries the same incentives as the notion “Medicare will pay for it”, but, as international experience shows, single national insurers, such as Medicare, have the clout to contain service providers’ prices — a clout which Michael Armitage points out is not available to private insurers.

Advice to our Treasurer: get rid of support for private insurers. There is no case for subsidising a financial intermediary imposing a $1 billion overhead on our health system and contributing to inflation. If you want to support private hospitals (there is a good case for doing so), support them directly, with incentives to compete with public hospitals rather than providing each sector with its privileged source of funding — government funding for public hospitals and private insurance for private hospitals.

As J K Galbraith said about indirect subsidies, “if you want to feed the chickens feed the chickens; don’t feed the horse and rely on the chickens to pick up the seeds from the horse sh-t.”