Car insurance can be a costly expense for many drivers, but it also plays a significant role in causing inflation. According to David Kelly, the chief global strategist at J.P. Morgan Wealth Management, rising car insurance and vehicle repair costs account for almost 70% of the increase seen in core service inflation.
Core service inflation, as Powell focuses on, excludes housing, food, and energy from the index. It makes up approximately 20% of all consumer spending. While overall consumer price inflation rose 4% in May, core service inflation came in at 4.7%.
Powell remains hawkish due to high services inflation, signaling more interest rate increases are likely. However, he should consider the fact that new and used car prices have skyrocketed since the start of the pandemic. The Manheim Used Vehicle Value Index, a widely followed index that tracks car pricing data, has risen by approximately 25%. This not only makes it more expensive to purchase a car but also to insure and repair it.
Regardless, car insurance remains an essential factor in the country’s economy and is worth paying attention to as we progress forward.
Rising Car Insurance Prices and Inflation Worries: What You Need to Know
Recent data released by the Bureau of Labor Statistics shows that car insurance prices have risen by 17% year-over-year in May, with vehicle repair and maintenance costs seeing a similar spike of 14%. These vehicle-related factors account for approximately 3.3% of the total 4.7% core services inflation.
While this is concerning news for car insurers and all car owners, there is some relief in sight: the prices of new and used cars have begun to fall slowly, which means insurance rates will eventually follow suit as well.
However, this slow decline in car prices does not change the fact that many auto insurers are in a tough spot. Analysts at Citi have reduced earnings estimates for Allstate and Progressive due to the problem of auto inflation. While Allstate stock has declined by 13% over the past year, Progressive stock is up 13% over the same time period.
While this may be good news for Progressive shareholders, it is important to keep in mind the risk of policy error. Powell staying hawkish could push the economy into a recession by raising interest rates too much.
Ultimately, flat pricing will eventually show up in inflation data but that does not make owning and maintaining a car any less expensive at the moment.
Report shows significant increase in monthly payments for new and used cars
According to a recent report published by credit bureau TransUnion (TRU), monthly payments for new and used cars in the first quarter of 2023 have increased by 28% and 32%, respectively, compared to the same quarter in 2020. In addition, loan-to-value ratios are on the rise. Satyan Merchant, senior vice president of the auto business at TransUnion, notes that the amount borrowed to purchase a used vehicle is “abnormal.”
Despite sales being lower, General Motors (GM) and Ford Motor (F) have maintained stable profits. This is largely due to Americans buying around 15 million new vehicles a year, compared to approximately 17 million prior to the pandemic. Higher prices have more than offset the decrease in volume, a positive development for investors.
Kelly, an industry expert, says that purchasing a new car is essentially a luxury expense and that recent purchases are skewed towards households that can afford them.
While the fluctuating prices of personal transportation create challenges for drivers and investors alike, Merchant reports that the supply of used vehicles is improving. This should lead to lower prices in the coming months, which will be a welcome relief for car buyers, investors and Federal Reserve Chair Jerome Powell.
