Rows of new Tesla cars are seen in a parking area near a customer collection point on April 15, 2024 in London, England.
Leon Neal | Getty Images
Rising auto insurance costs have been the main driver behind inflation over the past year, but relief may be on the way, according to Bank of America.
Economists at the bank see there are several driving factors behind rising costs to ease in the coming months, which could relieve some of the pressure on the category that has prompted the Federal Reserve to continue its battle with inflation.
“The strong increases in auto insurance premiums are a response to underwriting losses in the industry,” Stephen Juneau, an economist at Bank of America, said in a note. “Insurers have seen losses.” But he added: “There are signs that many insurance companies are starting to return to profitability.”
The hit to insurers, which was passed on to consumers, stemmed primarily from three sources: rising car prices, increasing costs of repairs, and “more accidents as driving trends return to normal,” Juneau said.
There is some good news on this front.
New and used car sales prices have trended lower in recent months and fell 0.4% and 6.9%, respectively, on a 12-month basis, according to Bureau of Labor Statistics data through April. Repair and maintenance services costs also remained flat in April despite rising 7.6% from a year ago.
However, auto insurance costs continue to rise.
This category rose 1.8% in April on a monthly basis, and 22.6% compared to last year, the largest annual increase since 1979, according to Bank of America.
In calculating the CPI, auto insurance has a weight of approximately 3%, so it is an important component.
Recent trends probably don't “mean your premiums will decrease, but we think the rate of increase should slow,” Juneau said.
This has been the general story on inflation: prices are not falling, but the rate of increase is a far cry from the pace of mid-2022 when inflation reached its highest level in more than 40 years. The overall CPI inflation rate was 3.4% year-on-year in April.
There is another good piece of information when it comes to Fed policy.
The central bank's primary measure of inflation is the Commerce Department's measure of personal consumption expenditures, not the Consumer Price Index from the Bureau of Labor Statistics. In the PCE measure, auto insurance has a smaller weight, meaning it is less of a driver of inflation.
If Bank of America's forecast of lower insurance inflation is accurate, that could give the Fed more confidence to at least start cutting interest rates later this year. Current market prices indicate the first cut is expected in September, with the possibility of another cut before the end of the year.
“We believe that further improvement in this total is one of the keys for the Fed to become more confident in the process of combating inflation and starting the reduction cycle,” Juneau said. “Until then, we expect the Fed to keep interest rates at zero.”
