Auto insurance rates see stomach-churning spike as inflation lingers on

Although inflation has somewhat moderated, one category of prices is rising at the fastest clip in more than five decades.

In March, headline inflation jumped a higher-than-expected 3.5% compared to a year ago. But that increase pales in comparison to auto insurance premiums, which rose by a staggering 22.2%—the biggest spike since the 1970s.

The irony is that insurance premiums continue to soar even as car prices are moderating—creating a paradox for consumers looking to upgrade their cars.

“We’re hearing from a number of shoppers that they’re declining to buy a car—or returning one—because they can afford the car, but not the insurance for it,” Sean Tucker, a senior editor at auto valuation company Kelley Blue Book, told Reuters.

This means many drivers may be forced to keep their depreciating automobiles at a time when vehicle repair costs are soaring. The BLS data showed that motor vehicle maintenance and repair costs jumped by 8.2% in March, more than double the rate of overall inflation.

“Customers definitely are getting sticker shock,” David Goldsmith, owner of Urban Classics repair shop, told CNBC.

Experts say they’re not quite sure why auto repair costs are soaring, but they suspect it may be tied to insurance premiums.

“I think the thing that we can say is true is that the cost of collision insurance claims are increasing,” said Matt Moore, a senior senior vice president at the Highway Loss Data Institute. “After that, it’s difficult to say why that is.”

The problem has become so severe that even the Fed has weighed in on the matter.

Fed chief warns of sticky insurance inflation

In March, Fed Chair Jerome Powell told the Senate Banking Committee that record insurance premiums are one of the biggest obstacles to cooling inflation.

And it’s not just auto insurance, either.

“Insurance of various different kinds—housing insurance, but also automobile insurance, and things like that—that’s been a significant source of inflation over the last few years,” he said. “And it’s to do with a million different factors.”

Data from Policygenius shows that homeowner insurance jumped by 21% in 2023 and has increased by 50% since 2019. According to KFF, health insurance premiums rose by 7% last year and are up by 22% since 2018.

Powell’s comments struck a nerve with investors, businesses, and the general public, who are waiting for the Fed to defeat inflation so that it can start lowering interest rates.

But the problem is inflation has proven stickier than expected, and insurance is partly to blame.

Actually, insurance premiums are part of the much larger services category that’s given the Fed its biggest headache. Unfortunately, there’s only so much central bankers can do to blunt this category.

Containing service inflation is harder

Service-sector inflation is less sensitive but not “entirely immune” to rate hikes, according to Sarah House, a senior economist at Wells Fargo and ex-Fed researcher.

“The gap always exists—there’s always much more service inflation than there is good inflation, which makes a lot of sense in the context that we import a lot of our goods and, as a result, we import a lot of deflation,” Tom Porcelli, chief U.S. economist at PGIM Fixed Income, told Barron’s.

Researchers at the San Francisco Fed have also identified healthcare, higher education, and housing as inflation categories that are less sensitive to interest rates.

Two of those industries—healthcare and education—are part of the service economy.

Longer-term measures of service inflation, such as the three-month and six-month annualized averages, have also ticked higher in 2024, leading KPMG to conclude that services inflation “is becoming more dispersed.”

That’s just another way of saying that service inflation is broadening from a few categories to encompass more items.

“That is not welcome news, as the service sector dominates the economy,” KPMG analysts wrote in September.

It’s an understatement to say services dominate the U.S. economy. According to data provided by the World Bank, services account for more than three-quarters of the U.S. GDP.