Fed chair hints at a surprising reason behind stubbornly high inflation
Fed Chair Jerome Powell has spilled the beans on a hidden reason why inflation remains stubbornly high—and it’s sure to resonate with many Americans.
Last month, Powell told the Senate Banking Committee that record insurance premiums have become one of the most significant contributors to lasting inflation.
“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,” Powell explained. “And it’s to do with a million different factors.”
In fact, in February, the consumer price index rose 3.2% year-over-year. Over the same period, motor vehicle insurance was up a whopping 20.6%.
“The behavior of the MVI [motor vehicle insurance] component of the CPI has truly been remarkable, and I don’t see any evidence of near-term relief,” Tom Simons, U.S. economist at Jefferies, told Reuters in an email.
Unfortunately, auto insurance rates are only the tip of the iceberg.
According to Policygenius, homeowners are spending $175 billion, or 21% more, on insurance in 2023 than a year ago. Compared to pre-pandemic levels, the cost of insuring a home in the U.S. has increased by a staggering 50%.
Insurance experts blame extreme weather events for the increase in homeowner insurance. "In the longer term, companies are withdrawing from writing insurance in some coastal areas. It’s a significant issue,” he said.
A bigger problem
Record insurance premiums are affecting not just consumers but also businesses.
According to benefits consultants at Mercer, Aon, and Willis Towers Watson, U.S. employers are set to incur the largest increase in health insurance costs in a decade. They forecast an 8.5% jump in medical premiums this year, more than double the rate in 2019 just before Covid.
For now, employers don’t plan to shift any of the cost burden to their employees, but that could change if the economy heads south.
“They don’t want to add more financial stress on employees who are also coping with inflation, especially in this time where they’re really relying on their health benefits as a way to keep employees working for them,” said Beth Umland, Mercer’s director of health and benefits research.
Even then, American workers are still paying more for their employer-sponsored health plans. According to health policy publication KFF, an employee can expect to pay roughly $6,575 for their share of a nearly $24,000 annual premium for family coverage.
As it turns out, health insurance premiums could be playing catch-up to the higher costs medical professionals incurred during Covid.
Healthcare inflation is growing “as medical providers push insurers for larger cost increases to cover the higher costs of wages and supplies that they endured during the last couple of years but were unable to pass on to payers,” Debbie Ashford, a chief actuary at Aon, told CNN.
Regardless of the type of insurance policy Americans buy, higher premiums are probably here to stay.
Federal limitations
There's so much the federal government can do because of state-level regulations and regional differences, experts say.
“We may have some authorities there as well, but those sit with independent agencies,” said White House Economic Council Director Lael Brainard when asked about surging insurance rates.
Nevertheless, the government has called on “big business to bring down those prices that they increased so much when supply chains were snarled.”
The good news is that experts predict smaller annual increases in insurance rates over the next 12 months.
“It’s hard for me to see how this might increase so much more from here that it would [influence] monetary policy,” Jeffries economist Simons told Reuters. I don’t think we’re looking at another 10-20% increase from here for the next 12 months.
The bad news is insurance costs are just another form of sticky inflation that Americans will have to contend with as the increases over the past two years have repriced the entire market upward.