By Steven Weisbart, Chief Economist
Prices are rising in general at a good pace. The Insurance Information Institute (I.I.I.) Inflation Watch spreadsheet contains the latest consumer price data from the U.S. Department of Labor Bureau of Labor Statistics (BLS). The CPI-U—the popular measure of consumer prices, sometimes called headline inflation—rose by 2.9 percent in July 2018 vs. July 2017, the same increase as the prior month; both are the largest 12-month increases since the period ending February 2012. The core CPI—the overall index minus the effects of price changes for food and energy—rose 2.4 percent for the 12 months ending July 2018—the largest increase since the period ending January 2017. (Most economists prefer to use the core, not the headline, inflation measure to avoid the “noise” of volatile prices for those items.) The core PCE deflator—the inflation measure that the Federal Reserve prefers—rose by 1.9 percent on a year-over-year basis in June 2018 (the latest available reading).
Price trends for items that more directly affect property/casualty (P/C) insurance claims do not necessarily follow broad-based price indexes. Prices for items such as intensive healthcare affect claims under third-party coverages such as workers compensation and bodily injury liability, as well as first-party coverages like Personal Injury Protection (PIP), med pay and obviously, medical expense insurance. For many years these price increases have outpaced broad measures of inflation, and this is still true today. In July 2018, seasonally adjusted on a year-over-year basis, prices for inpatient hospital care rose by 4.1 percent. Seasonally adjusted prices for outpatient hospital services rose by 4.3 percent in July 2018 over July 2017. Both of these are essentially unchanged from last month. Price increases for prescription drugs have been moderate lately, rising by only 0.9 percent in July 2018 over July 2017.
Price increases relating to auto insurance property claims have been quite moderate recently. Prices for motor vehicle parts and equipment, which affect not only comprehensive and collision claims, but property damage liability as well, rose by 0.1 percent in July 2018 vs. July 2017. Parts-and-equipment prices have been flat or falling consistently since 2013 and are now about the level reached in May 2011. Prices for motor vehicle repair rose by just 1.3 percent for the 12 months ended July 2018, the same as for the prior month. Prices for motor vehicle body work rose by 2.9 percent year-over-year (not seasonally adjusted), the same as for the prior month.
The BLS survey of consumer prices for motor vehicle insurance in July 2018 rose by 7.4 percent year-over-year. Of course, many factors other than prices for auto repair, such as the continuing drop in insurers’ investment income, and continuing above-CPI growth in the prices for intensive medical care, likely are affecting these increases. Severity of auto claims is also increasing—not primarily from price increases, but from more expensive vehicles on the road, with sophisticated parts that are more expensive to replace than comparable parts on older vehicles. However, the 12-month result does not capture what has happened to auto insurance price increases in the past five months, which have posted a much more moderate pace. In March 2018 auto insurance prices rose by 0.3 percent; fell by 0.2 percent in April; rose by 0.4 percent in May; rose by 0.3 percent in June; and rose by 0.2 percent in July.
The Census Bureau computes a price index for new single-family houses under construction. The latest data for June 2018 show a 4.9 percent increase over the index in June 2017. However, the National Association of Home Builders, which tracks the price of framing lumber, reported that in July their index climbed to $520, a 25.3 percent increase over the July 2017 index, and near an all-time high.
Since the economy is nearing or is at full employment, economists believe that employers will have to hike wages further in order to attract needed workers, and that wage increases will morph into consumer price increases. And wages have been rising. The Bureau of Labor Statistics reported that, on a year-over-year basis, average weekly earnings of private sector employees grew by 3.0 percent in July 2018 over the prior July, but these economy-wide numbers obscure variations in particular industries. For example, average weekly earnings in July 2018 vs. July 2017 rose by 4.0 percent in the construction industry, but by only by 1.1 percent in manufacturing. On the services side, average weekly earnings rose by 5.4 percent in the financial activities industry, but by only 1.6 percent in the information industry. Wage growth affects workers compensation and indirectly, liability and PIP claims. Wage growth above inflation means consumers have increased buying power, which could lead to stronger economic growth near-term.
One additional price bears watching: the price of money (interest rates). The Federal Reserve’s Open Market Committee is likely to continue to raise the short-term “fed funds” rate through 2018, which often drives interest rates for longer-term loans. Long-term interest rates will likely also rise because of substantial additional borrowing by the federal government, both because of the recently-enacted federal income tax changes and the subsequent budget agreement. But even before the Tax Act and budget agreement, interest rates were rising. Moody’s seasoned AAA bond yield in July 2018 was 3.87 percent, up from 3.70 percent a year earlier. Higher long-term interest rates can be expected to have a dampening effect on economic growth, but this could be offset by the short-term enhancing effects of more money in consumer and business pockets from the income-tax cuts. Higher interest rates will help P/C insurer investment income, but could weigh on the capital gains element of investment gains (as the prices of currently-held low-yielding bonds fall).