Inflation is easing, but car insurance remains a pain point

Inflation is cooling after a hot start to 2024 but is still higher than policymakers would like, prompting Federal Reserve officials to vow on Wednesday to hold off on easing interest rates for longer.

One culprit: The cost of auto insurance.

Consumer Price Index data released earlier in the day showed US inflation rose 3.3% year-on-year in May, compared with a 3.4% increase in April. Costs for some of the necessities consumers consider most food, gas, utilities held flat or decreased month-over-month, but other necessities, including housing and medical care, were still on the rise.

Auto insurance is one of the hottest remaining issues, growing 20.3% over last year.

After falling sharply in 2020 as pandemic lockdowns kept drivers off the road and insurance companies rolled back premiums for policyholders, the average cost of comprehensive car insurance has reached about $165 a month nationwide and $157 in Minnesota, according to personal finance website ValuePenguin. Industry experts point to a number of reasons for the price hike, including rising repair costs for more complex cars, more frequent and serious crashes, severe weather and an increase in consumer litigation.

“The reality is that auto insurers are in the business of providing financial security and a promise to their policyholders,” said Tony Cotto, director of auto policy and underwriting for the National Association of Mutual Insurance Companies. “And as the cost of fulfilling that promise increases, so must the cost of the actual product, the insurance contract.”

Auto repair and maintenance costs are 7.2% higher than in May 2023, according to the Bureau of Labor Statistics, continuing a rapid increase that began in 2021. Other costs related to driving, including the costs of the cars themselves , have fallen: Wednesday’s federal inflation report showed a 9% year-over-year decline in the used car and truck index.

Financing a car purchase with a loan won’t get any cheaper in the near future Federal Reserve officials this week kept the federal funds rate at 5.25%-5.5%, but easing inflation could prompt a cut later this year year. Officials had earlier forecast three interest rate cuts for 2024, but they were halted as inflation continued, meaning borrowing costs will remain higher for longer.

“We are strongly committed to returning inflation to our 2% target in support of a strong economy that benefits everyone,” Fed Chairman Jerome Powell said at a press conference on Wednesday. “We are maintaining our accommodative monetary policy stance to keep demand in line with supply and reduce inflationary pressures.”

Some of what auto cops are seeing now is a correction from the peak of the pandemic, when prices were extremely low, said Rick Gorvett, a professor in the department of mathematics and economics at Bryant University.

“Has a [cycle] in insurance, and we have periods where rates go up usually not that much, but if you take the whole cycle, some up and down part of the cycle, you get a very reasonable kind of annual increase,” he said.

Consumer advocates are not convinced. Bilal Baydoun, director of policy and research at the Washington, DC-based Groundwork Collaborative, said he is skeptical that the external factors that insurance companies are pointing to are enough to justify the extent to which they have raised prices. There is a power mismatch between these companies and consumers, he said, including the ability of insurers to lobby lawmakers and collect data on the behavior of individual drivers.

“I think the auto insurance industry needs to be held to account, and I think eventually people won’t be willing to tolerate this anymore,” Baydoun said, noting that consumer pressure has recently pushed other companies, including Target and McDonald’s, cut prices. .

“They’re going to want very, very clear explanations as to why their rates are going up from the exorbitant levels that they are.”

Meanwhile, consumers can save money by shopping around with different companies, bundling home and auto insurance or carefully removing specific areas of coverage like rental car reimbursement, said Leslie Kasperowicz, managing editor at Insurance.com.

While the cost of auto insurance is unlikely to fall significantly and pressure on consumers will continue as policyholders renew at different times, industry observers say they do not foresee additional increases.

“Insurance companies are starting to see things in tiers in terms of what their loss ratios look like, which is how much they pay out versus what they earn in premiums,” Kasperowicz said. “So I think we’re still going to see it going up for a while, and then it’s going to level off.”

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