Surging auto insurance costs are fueling higher inflation

Surging auto insurance premiums are fanning the flames of high inflation and keeping the financial pressure on millions of U.S. households nationwide. 

Consumer prices rose 0.3% in January from the previous month and climbed 3.1% from the same time last year, the Labor Department reported Tuesday. Both of those figures came in higher than the 0.2% monthly increase and 2.9% headline figure forecast by Refinitiv economists.

Many of the usual culprits – including rent and groceries – were to blame for the hotter-than-expected reading. But a surprise uptick in insurance prices also made a notable contribution last month.

The cost of auto insurance jumped 1.4% in January, bringing the total annual gain to 20.6% – the fastest annual rate on record. When compared with early 2019, motor vehicle insurance is nearly 40% more expensive. Experts say the problem could soon get worse before it begins to improve.

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"New- and used-vehicle prices have moderated as dealer lots fill up. Insurance companies, however, are still playing catch-up," said Matt Colyar, a Moody's Analytics economist. "Rapid as the increase in insurance costs has been, motor vehicle repair costs are up by even more over that period, suggesting the CPI for motor vehicle insurance has further to rise."

In 2023, the average U.S. rate for full auto insurance surged to $2,019, a 24% increase from $1,633 in 2022 and a nearly 29% jump from $1,567 the previous year, according to Insurify, an insurance comparison shopping site. That amounts to roughly 3.4% of the median household income. Even a bare-bones policy required by states climbed to $1,154 per year in 2023.  

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Several factors have caused the spike in car insurance rates. The price of both new and used cars rose sharply after the COVID-19 pandemic, the result of both supply chain disruptions and unseasonably high demand. As a result, vehicles are more expensive and costlier to replace, which has driven up the price of repairs. 

"While inflation is slowing down, insurance companies are reassessing their risk models to account for the post-pandemic rise in car crashes, the increase of claims from extreme weather and the sustained elevated cost of vehicle repairs," said Shannon Martin, a Bankrate analyst. "Remember that base rate increases can only be implemented at the renewal period, so some policyholders are still paying for the increase from 2023, and have yet to be hit with potentially higher 2024 rate renewals." 

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On top of that, the country is grappling with a shortage of mechanics, which is driving auto repair costs even higher. One source, the TechForce Foundation, estimates the number of graduates completing post-secondary programs in the automotive sector has plummeted by 20% since 2020. The number of automotive technicians is projected to continue decreasing in the coming years.

"If you’ve noticed the sting when renewing your policy recently and haven’t previously been motivated to shop around, now’s a good time," said Elizabeth Renter, data analyst at NerdWallet. "While prices are rising across carriers, you might not be getting the best deal. Auto insurance – like many other mandatory ongoing expenses – is easy to set and forget, but when prices are rising like this, it can pay to get quotes."

Inflation has created severe financial pressures for most U.S. households, which are forced to pay more for everyday necessities like food and rent. The burden is disproportionately borne by low-income Americans, whose already-stretched paychecks are heavily impacted by price fluctuations. 

The typical U.S. household needed to pay $213 more a month in January to purchase the same goods and services it did one year ago because of still-high inflation, according to new calculations from Moody's Analytics chief economist Mark Zandi.