Soaring auto insurance costs have been a major contributor to inflation over the past year, but relief could be on the horizon, according to economists at Bank of America.
The bank’s economists attribute the recent surge in auto insurance rates to several factors, all of which are showing signs of easing in the coming months. This potential shift could alleviate some of the inflationary pressures that have prompted the Federal Reserve to maintain its aggressive stance against inflation.
“The turbocharged increases in motor vehicle insurance premiums are a response to underwriting losses in the industry. Insurers saw losses,” explained BofA economist Stephen Juneau in a recent note. However, he added optimistically, “There are signs that many insurers are getting back to profitability.”
The primary reasons behind the insurance industry’s losses—and the subsequent rise in premiums for consumers—stemmed from three main sources: elevated vehicle prices, increased costs for repairs, and a higher incidence of accidents as driving patterns returned to pre-pandemic norms, Juneau noted.
Fortunately, there are positive developments in these areas. Sales prices for new and used vehicles have been trending lower, with data from the Bureau of Labor Statistics (BLS) showing a 0.4% decrease in new vehicle prices and a 6.9% drop in used vehicle prices over the past year. Additionally, the costs for repair and maintenance services remained flat in April, though they were still 7.6% higher compared to a year ago.
Despite these encouraging trends, motor vehicle insurance costs have continued to rise. In April alone, the category saw a 1.8% monthly increase and a staggering 22.6% year-over-year jump—the largest annual increase since 1979, according to Bank of America.
In the Consumer Price Index (CPI) calculation, auto insurance holds a significant weight of nearly 3%, making it a notable component in overall inflation measures.
“The recent trends probably do not mean that your premium will fall, but we think the rate of increase should slow,” Juneau suggested.
This mirrors the broader inflation narrative: while prices are not necessarily decreasing, the rate of increase has slowed considerably from the mid-2022 peak when inflation reached its highest level in over four decades. Overall CPI inflation was running at an annual rate of 3.4% in April.
There is another piece of good news regarding Federal Reserve policy. The Fed’s primary inflation gauge is the Commerce Department’s measure of personal consumption expenditures (PCE), rather than the BLS’s CPI. In the PCE measure, auto insurance carries a smaller weighting, thus exerting less influence on overall inflation.
If Bank of America’s forecast for a slowdown in insurance price increases proves accurate, it could bolster the Fed’s confidence in the disinflationary process and potentially lead to interest rate cuts later this year. Current market expectations suggest a possible first rate cut in September, with another one potentially following by year-end. “We think further improvement in this aggregate is one key for the Fed to become more confident in the disinflationary process and start its cutting cycle,” Juneau concluded. “Until then, we expect the Fed to keep rates in park.”
