Americans are spending more than ever on car insurance. Numbers published this week show shocking price increases. However, Federal Reserve Board Chair Jerome Powell may have the best perspective on the problem.
Powell told Congress Tuesday that the insurance cost is so high that it’s keeping inflation up and preventing the Fed from cutting interest rates as early as it once hoped.
Average Policy Up More Than 20% in One Year
The average car insurance policy cost has gone up 20.6% in the last year, according to data released Tuesday by the U.S. Bureau of Labor Statistics. Car insurance costs are growing faster than groceries, restaurant meals, or medical care costs.
Related: How to Buy Car Insurance: Everything You Need to Know
According to the bureau’s Consumer Price Index, the average 6-month car insurance policy in February cost Americans $806.44.
That’s up from $668.81 this time last year and $431.31 a decade ago. Car insurance costs haven’t quite doubled in a decade. But they’re not far from it and growing fast.
Fed Chair Cites Insurance Costs
The Federal Open Market Committee of the U.S. Federal Reserve, commonly called “the Fed,” controls the interest rate for overnight loans between banks. That rate then trickles through the economy as banks change the rates used to make every other loan, including car loans, in response.
The Fed began hinting at 2024 rate cuts last year but has not yet moved.
Federal Reserve Board Chair Jerome Powell told Congress last week the board “does not expect that it will be appropriate to reduce the target range until it has gained greater confidence” that inflation is under control.
He singled out insurance costs, noting, “Insurance of various different kinds — housing insurance, but also automobile insurance, and things like that — that’s been a significant source of inflation.”
Complex Repairs, Extreme Weather
Increasingly expensive car repairs are partly to blame. Today’s cars frequently have sensitive electronic components, such as cameras and radar sensors that power parking assistance technology, in vulnerable areas where they’re easily damaged in even minor accidents.
Accidents are both more expensive and more common. Crash rates are up nationwide in the aftermath of the COVID-19 pandemic.
Related: Here’s How Much the Average Car Repair Now Costs
Insurers are raising prices much faster than repair costs are growing. According to the Consumer Price Index, the average car repair has grown 8.5% more expensive in the last year, while insurance costs have grown by more than 20%.
Insurers may also be nervous about the increasing effects of climate change.
“In the longer term, companies are withdrawing from writing insurance in some coastal areas,” Powell told Congress. “It’s a significant issue.”
Changing Our Shopping Advice
Insurance costs were once a minor consideration for car shoppers. That’s no longer the case. With costs nearly doubling in a decade, we now recommend that shoppers obtain an insurance quote for any new car they consider buying before they put money down.
How To Find Insurance Costs Before Buying A Car
