Skyrocketing car-insurance premiums pushing inflation higher

Soaring insurance premiums, particularly for autos, are fueling rising consumer prices and complicating policymakers’ attempts to beat back inflation.

Inflation cooled for much of the year before picking up this fall, with insurance prices for autos, homes and medical care contributing to a 15 percent of the increase in overall consumer prices, economists say. A double-digit spike in auto-insurance prices drove the vast majority of that rise.

Indeed, November’s hotter annual inflation gain of 2.73 percent would have been much lower, closer to a 2.37 percent inflation rate, without the outsize increase to auto insurance.

“It is punching well above its weight for that contribution,” said Josh Hirt, a senior economist at Vanguard.

Insurance premiums are among a handful of stubborn costs that have yet to yield much relief for consumers, in addition to shelter costs and other services like medical care.

Car insurance has remained elevated, and it has a bigger influence on overall inflation than other types of insurance because it’s required to drive in most states. And that cost can multiply with more than half of households owning two or more cars, according to census data.

Since just before the pandemic in December 2019, consumers have seen a roughly 51 percent jump in auto-insurance prices, Hirt said.

Car insurance prices revolve around the supply of cars available for purchase, which has been trending far more expensive as manufacturers funnel resources into souped-up versions of pricey models and cut back on cheaper options. New technologies have made vehicles safer, but the costs are higher to replace these more expensive parts. Labor costs to repair cars have also skyrocketed.

Rising accident frequency and severity is another factor, said Loretta Worters, a spokeswoman for the Insurance Information Institute, fueled by distracted and reckless driving. “As a result, we are seeing more fatalities and injuries, leading to increased attorney involvement in claims,” she said.

Kyle Morrison, 52, of Seattle, was taken aback by the sharp rise in insurance premiums on his 2017 Kia Forte, which jumped to about $200 per month in December from roughly $130, he said.

Initially, Morrison, a transportation contractor with a clean driving record, thought the price hike by his insurer Safeco stemmed from a recent move to a new neighborhood, he said. But his insurance representative told him it largely had to do with price increases “across the board and from all insurance carriers,” Morrison said.

Liberty Mutual, which owns Safeco, declined to comment.

Overall inflation has eased over the past year, though data released Wednesday showed prices appeared stuck above the Federal Reserve’s goals, which aim to keep inflation at 2 percent.

Top Federal Reserve officials have signaled that insurance costs are making it harder to bring down lingering inflation.

“It is clear that insurance of various different kinds, housing insurance but also automobile insurance and things like that, that’s been a significant source of inflation over the last few years,” Federal Reserve Chair Jerome H. Powell told senators in March.

Going forward, auto insurance prices could ease soon because they’re catching up with big jumps in auto prices in recent years. There is some evidence of that happening with the latest report on consumer prices, as auto insurance inched up just 0.1 percent on a monthly basis. Its roughly 13 percent annual gain was down from a 14 percent increase in October.

Some economists warn costs could remain elevated or even rise further, depending on the way President-elect Donald Trump implements promised tariffs on imports from Mexico and Canada, where many autos are manufactured. Trump has threatened to slap a 25 percent tax on all products from Canada and Mexico unless they stem the flow of migrants and drugs.

Tariffs on motor vehicles and parts will “lead to another round of auto-insurance inflation, which will then create further stickiness in overall inflation,” said Joe Brusuelas, chief economist at RSM.

Another wrinkle that could influence prices: whether more motorists simply forgo auto insurance altogether, which could ultimately fuel higher premiums for everyone else. Since 2020, the rate of uninsured motorists has continued to inch up each year, according to the Insurance Research Council, rising from 11.6 percent in 2019 percent to 14 percent in 2022, the last year for which complete data exists.

The recent cycle of premium increases for auto insurance “is likely the biggest driver for the increased rate of uninsured motorists,” IRC President Dale Porfilio said in a statement.

Sandy Borkovic, 59, is considering going carless. A contract processor at an Arizona-based mortgage broker, Borkovic saw the bundled price to insure her two cars and home in Phoenix shoot up by about $5,000 this year, to nearly $12,000 per year.

She’s had no tickets or accidents, nor any claims on the house or the cars—a 2021 Chevy Tahoe and a 2014 Nissan Altima. Though she tried to shop around for a better deal, her insurance agent said there weren’t better rates elsewhere.

“I’ve lived in Arizona for 31 years; I have never seen insurance rates like this, ever,” she said.

She’s planning to sell her home and relocate to New York City— where she won’t need a car.