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Rising auto insurance rates helped drive a recent spike in the CPI – which may have a knock-on effect on the rest of the economy
Is auto insurance keeping your clients’ mortgage payments high?
That may sound like an odd question, but the surge in auto insurance prices is definitely having a knock-on effect on the rest of the economy.
The spike in consumer prices during January was primarily driven by increases in services costs – particularly transportation services, medical services and shelter costs. Of these, transportation services stood out due to the sharp upswing in car insurance premiums.
Insurance rates drive disparity between CPI and PCE
The rise in auto insurance rates has been a significant driver in the disparity between the Consumer Price Index (CPI) and the Federal Reserve’s preferred Personal Consumption Expenditures (PCE) indicator, according to analysis by Employ America.
PCE inflation is forecast to average around 2% in the second half of the year, according to a poll of economists conducted by Reuters. But the CPI is predicted to remain above target until at least 2026.
Employ America analysis suggested that the wedge between CPI and PCE might be partially driven by state-level regulatory changes allowing insurers to hike premiums.
Regulators in states like New York, New Jersey and California have approved rate hikes, The Financial Times reported – and insurers are unlikely to let any grass grow under their feet in implementing them. Allstate, for example, implemented substantial rate increases in those states last year, and has said it plans to pursue additional hikes in 2024.
Hikes likely across the US
Those hikes will likely be seen right across the country. A recent report from ValuePenguin projected that American drivers would see rates rise by an average of 12.6% in 2024 – the steepest increase since 2018. Every state in the union is expected to see a rate hike, with 3% being the minimum expected rise.
Expenses related to motor vehicle maintenance and repair, which can influence insurance costs, have also gone up, The Financial Times reported. Maintenance and repair costs jumped 6.5% in 2023, with a further 0.8% rise in January.
Goldman Sachs economists predict a further acceleration in transportation services costs as part of what they term a ‘January effect’, which includes temporary price hikes at the beginning of the year across various categories including prescription drugs, car insurance, tobacco and medical services, The Financial Times reported.
Will rates stay high?
With all this in mind, when will the Federal Reserve cut the fed funds rate, currently at 5.25%-5.50%?
It’s likely to be at least a few months, according to economists.
“The Fed speak of late has sounded a hawkish tone, keen to go against more dovish market pricing and rein in the excitement about interest rate cuts,” Employ America executive director Skanda Amarnath wrote in a recent blog post. “The Fed instinctively wants to let the inflation data drag them to cuts (rather than get ahead of where the data is and risk getting caught offside).”
Meanwhile, the majority of economists polled in a recent Reuters survey peg the Fed’s first rate cut of the year for June, with most respondents saying it’s more likely the cut will come later than forecast rather than earlier.
Since September, economists polled by Reuters have predicted the Fed’s first rate cut for around the middle of the year. Market predictions, however, have swung from March to May and have now priced June as the likeliest time for a cut.
Many market watchers believe that the Fed is determined not to repeat its mistake in 2021, when it – and most other central banks – believed high inflation to be a “transitory” phenomenon, Reuters reported.
“The ‘transitory’ blunder has made officials determined not to be caught on the wrong side of the inflation story for the second time in the same cycle,” NatWest Markets chief US economist Kevin Cummins told Reuters.
No cut in 2024?
Some market watchers have even advanced the theory that the Fed may not cut rates at all this year. Joe Seydl, senior economist at JPMorgan Private Bank, said he predicts only a 15% chance that the Fed will hike rates in 2024 – but that a rate cut this year is “essentially optional,” as the economy is likely to keep growing regardless of the central bank’s policy moves.
“We shouldn’t expect the Fed to cut just because the markets expect it,” Seydl told Business Insider. “They may push back against market pricing when they feel it is appropriate. If I had to speculate, I’d say the main reason they probably want to start cutting is that keeping rates too high for too long may start to distort investment activity in the economy, which could have long-run negative supply consequences.”
Jimmy Chang, chief investment officer for Rockefeller Global Family Office, told Business Insider that the current data “doesn’t really build a case for rate cuts.”
“If the Fed eases prematurely, they run the risk of rekindling inflation pressure again down the road,” he said. “That’s the last thing the Fed wants, given how their credibility was hurt in 2021 and 2022.”
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