Auto insurance rates spike despite easing inflation
Americans are paying more for auto insurance than they ever have, further straining inflation-hammered household budgets.
According to the Bureau of Labor Statistics, motor vehicle insurance rates increased by 1.2% from August to September and 16.3% year over year.
By comparison, the overall Consumer Price Index (CPI) increased by 0.2% from August and 2.4% from a year earlier.
The discrepancy between headline inflation and auto insurance prices is much more striking over the last four years.
According to macro strategist Charlie Bilello, auto insurance rates have increased by a staggering 59.7% since September 2020, the largest increase in five decades.
This vastly exceeds some of the worst inflation categories, including home prices (47%), gasoline (44.4%), and transportation (41.9%).
The big problem with auto insurance is that it’s part of the service economy, which “relies heavily” on price inputs from other industries, according to Sarah House, a senior economist at Wells Fargo Economics.
“Services inflation was slower to peak on the way up and likely to be slower to recede on the way down,” House said.
House’s explanation is unlikely to resonate with Americans, who’ve been forced to reduce household spending because of their insurance bills.
Auto insurance is becoming a big problem
The relentless increase in auto insurance rates “shows no signs of abating,” said Maya Afilalo, an industry analyst with AutoInsurance.com.
A recent AutoInsurance.com study revealed that 48% of drivers reported an increase in their insurance rates this year, with another 6% receiving notices that further price hikes were on the way.
Perhaps shockingly, 85% of drivers said they were worried about being able to afford their premiums, with 37% expressing “extreme” or “moderate” concerns.
As a result, one in three drivers has reduced their household spending to pay for their ever-increasing auto insurance premiums.
Insurance companies say they’ve been forced to raise prices because of natural disasters, poor driving habits, and costly repair services.
As CBS News reported, the true cost of auto insurance is highest in states that are most vulnerable to extreme weather events such as hurricanes and tornadoes.
However, according to a 2023 report by the Congressional Research Service (CRS), these factors don’t tell the full story of why insurance rates are surging.
It turns out that price hikes are a way for insurance companies to plug the hole filled by their falling bond investments.
“Investments in bonds make up approximately 50% of insurer assets,” the CRS report said. Although investing in bonds has become more profitable due to rising interest rates, this only applies to newly purchased or variable-rate bonds.
“But for the large stock of existing fixed rate bonds, increasing interest rates reduce the value of these bonds, and the steeper the increase, the greater the drop in value,” the report said.
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