Uninsured Motorists Are Driving Up Rates
Why Is Inflation Sticky?
Markets were relieved when the consumer price index (CPI) decelerated a bit in April after three consecutive disappointing releases earlier this year. The monthly rise in consumer prices slowed to 0.3% and pulled the annual rate of inflation down to 3.4% in April from 3.5% the previous month. But these figures are still running too hot for the Federal Reserve (Fed) as they pursue their dual mandate of price stability and full employment. So where do we go from here?
It comes as no surprise that prices for some goods and services do not change as quickly as others. These sticky components of inflation include many types of services, medical care, and motor vehicle insurance.
Services Inflation Is Past Peak
A recently popularized way to track inflation is just looking at only services prices, excluding energy and housing. Although this category had a recent surge, services inflation is likely past its peak. Goods prices drove much of the moderation in consumer inflation in recent periods, so it’s helpful to strip out goods — both durable and nondurable — and focus on stickier services prices.
Sticky Services Inflation Turned a Corner
Source: LPL Research, Bureau of Economic Analysis, 05/16/24
Nagging Risks to Sticky Consumer Prices
An inflationary component often overlooked is motor vehicle insurance, but a trend within the industry could mean some of the sticky components of inflation might stick around longer than markets think and potentially cause core services ex-housing to hover above 3% for an extended period.
Auto insurance costs have risen for many reasons, including higher costs of repairs, crime, and more uninsured drivers. The American Property Casualty Insurance Association says deteriorating driving patterns also contributed to higher premiums. [1]
The rising percentage of uninsured motorist claims has placed additional pressure on insurance companies, who have been successful in passing along these costs to the consumer.
[1] “Auto Insurance: The Uncertain Road Ahead” published by The American Property Casualty Insurance Association, June 2023
Insurance Rates Still Might Have Upside Risk from Uninsured Motorists
Year | % of Uninsured |
2017 | 11.6 |
2018 | 11.5 |
2019 | 11.1 |
2020 | 13.9 |
2021 | 14.2 |
2022 | 14.0 |
Source: LPL Research, Insurance Research Council, 05/29/24
Conclusion
Battling inflation is not just for central bankers. Milton Freidman was mostly right when he said inflation is always and everywhere a monetary phenomenon. However, fiscal and regulatory policies also have inflationary implications along with demographic shifts. As noted in previous weeks, our economy is less interest rate sensitive, adding a challenge for effective monetary policy. In sum, the structural shifts in the economy could make some of the stickier components of inflation stick around for a while.
From an investment perspective, commodities could benefit from this period of sticky inflation, especially while we have supply and demand imbalances.
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