Car Insurance: A Key to Slowing Inflation?

As the Federal Reserve continues its battle against inflation, one sector that has been quietly contributing to the overall price increase is car insurance. While car prices and repair costs have been decreasing, auto insurance rates have remained elevated, diverging from broader inflation trends. This article explores the relationship between car insurance rates and overall inflation, and how changes in car insurance rates can impact consumer behavior, which in turn affects inflation.

Car insurance rates have been rising steadily since 2022, even as overall inflation has cooled. In March 2023, auto insurance rates rose 2.6% and were up 22% from a year ago, while consumer-level inflation has eased significantly (AP, March 2024). This divergence can be attributed to factors such as increased claim severity, higher repair costs, and social inflation (excessive inflation in claims caused by policyholder or plaintiff attorney practices) (Triple-I, 2024).

The components of car insurance premiums most sensitive to inflation are auto repair costs, medical bills, and property damage. Inflation has led to an increase in the cost of auto repairs, which is a significant factor in determining car insurance premiums. According to the U.S. Bureau of Labor Statistics, overall maintenance and repair costs jumped 8.2% in March 2024 from a year ago, although this rate has eased over the last year (AP, March 2024). Higher overall auto prices and auto repair costs prompted insurers to raise premiums as overall car values jumped.

Changes in car insurance rates can impact consumer behavior, which can then influence inflation. As car insurance rates increase, consumers may decide to forgo car ownership or delay purchasing a new vehicle, leading to a decrease in demand for new cars and helping to stabilize or even reduce car prices, thereby mitigating inflationary pressures. For instance, in the U.S., used car prices fell by 10.9% over the past year, marking the third-largest drop in prices across all goods and categories (CNN, March 18, 2024).

Higher car insurance rates can also encourage safer driving habits, leading to a decrease in claims frequency and helping to stabilize or even reduce car insurance rates. For example, a study by LexisNexis Risk Solutions found that almost 41,000 people died in car crashes last year, 8,000 more fatalities compared to 2013. This increase in claims severity has led to higher car insurance rates (CNN, March 18, 2024).

In conclusion, car insurance rates have been diverging from overall inflation trends, with components such as auto repair costs, medical bills, and property damage being most sensitive to inflation. Changes in car insurance rates can impact consumer behavior, which can then influence inflation by encouraging safer driving habits, reducing car ownership, and decreasing claims frequency. As the Federal Reserve continues its battle against inflation, understanding the relationship between car insurance rates and overall inflation can provide valuable insights into potential avenues for mitigating inflationary pressures.