The Hidden Sources On US Inflation: Soaring Auto Insurance Premiums

Though US inflation eased last year, an unusual sector has surprisingly rebounded in recent months, preventing a further fall in consumer prices- auto insurance.

The monthly Consumer Price Index (CPI) unveiled by the US Department of Labor on Thursday shows a 3.4% yearly increase in the total CPI for December, beating economists' forecast of 3.2% and November's 3.1%.

Several familiar categories occupied the bulk of the overshoot, especially the persistently high housing costs contributing to nearly two-thirds of the inflation. However, the sharpest annual surge in auto insurance in nearly half a century has made a significant contribution to economic growth, and this contribution may not fade soon.

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, said Tom Simons, an analyst at Jefferies US, in an email.

US government data shows auto insurance premiums soared 20.3% year-on-year last December, the largest increase since the mid-1970s. The monthly level of premiums for the entire year continued to rise, up 1.5% month-on-month.

This equates to last year's monthly average, exceeding all pre-pandemic monthly averages. Furthermore, auto insurance — an expenditure category seldom having a significant impact on overall inflation — accounted for 15% of the total price increases in the last quarter of 2023.

Simons pointed out several factors aggravating premium hikes such as a rise in labor and parts costs for repairing damaged vehicles and the general increase in car prices over the past few years, which elevated the base collateral for insurance.

He stated that a decline in demand from reinsurance companies is also a factor, natural disaster risk is probably contributing to the margin. Auto insurance is typically regulated on a state-by-state basis, with costs also influenced by regional variations.

When asked about the steep rise in insurance costs, Lael Brainard, the director of the White House National Economic Council, stated: We may have some authorities there as well but those sit with independent agencies, and there are calls to big business to bring down those prices that they increased so much when supply chains were snarled.

What's unclear at this point is to what extent insurance costs alone can hinder the further progress of falling inflation and disrupt the prospects of the Fed's rate cuts later this year.

Simons stated, It's hard for me to see how this might increase so much more from here that it would have an influence on monetary policy. I don't think we're looking at another 10-20% increase from here for the next 12 months, but again, I'm no expert on insurance.