How Inflation Can Impact Your Car Insurance Rate

Quick Answer

Auto insurance rates are impacted by inflation in multiple areas of the automotive industry, including vehicle values, labor costs, the price of replacement parts and health care costs.

man seated in driver's side of car looking pensively at phone

Food and housing aren't the only items that have been affected by inflation in the past few years. The price of car insurance has also skyrocketed. Auto insurance rates increased by an average of 20.3% from December 2022 to December 2023, the largest one-year increase since 1976, according to the Bureau of Labor Statistics. Understanding what's fueling price increases may help you find ways to save. Here's what you need to know about rising rates and ways to keep costs as low as possible.

Does Inflation Affect Car Insurance?

The short answer is yes, inflation affects car insurance rates. While prices in some sectors have eased in recent months, the price of car insurance continues to rise, well above the rate of inflation, due to pricing pressures in multiple areas of the automotive industry.

Auto prices are up, as is the price of replacement parts. The automotive industry is also experiencing a shortage of qualified mechanics, resulting in increased labor costs.

These and other factors have driven up claim costs and insurance company losses, leading to a surge in rates.

Why Are Car Insurance Premiums Going Up?

Several factors are to blame for the dramatic rise in auto insurance rates, including:

  • Ongoing effects of the semiconductor chip shortage: You probably remember the pandemic-fueled chip shortage that affected everything from cellphones to computers to cars. Chip production has leveled out since then, but their usage has not. A single car may contain as many as 1,000 to 3,000 semiconductor chips. In 2020, an average vehicle had $500 worth of chips, but that figure is expected to jump to $1,400 by 2028. Increased chip usage results in higher-priced cars as well as repair and replacement costs.
  • Rising health care prices: You might wonder what medical costs have to do with auto insurance. But insurance providers don't just cover vehicle damage; they also cover injuries that drivers and passengers sustain after a crash. Providers factor the rising cost of health care into insurance premiums.
  • Severe weather: Weather incidents with losses of over $1 billion have increased significantly in the past five years, according to the National Centers for Environmental Information. Auto insurers are on the hook for payouts when vehicles are damaged or totaled due to weather-related events.
  • Price of cars: The more expensive a car is, the more it costs to repair or replace. The average cost of a new car increased by 18% over the past three years and currently sits at almost $49,000, according to Kelley Blue Book.
  • Repair costs: Car repair costs increased by about 10% from December 2022 to December 2023, according to the December 2023 consumer price index.
  • Car rentals: Labor shortages mean it takes longer to fix damaged vehicles, leaving insurers paying for rentals for extended periods.

How to Lower Your Auto Insurance Rates

Auto insurance prices show no signs of dropping anytime soon. However, you can do things to reduce your rates.

  1. Improve your credit score. Your credit history may affect your auto insurance rates if your provider considers credit-based insurance scores in its pricing calculation (in states where it's allowed). These scores are based on information in your credit reports and help insurers predict the likelihood that you will file a claim. A higher credit score may help you qualify for a lower rate because people with higher scores typically file fewer claims. Get a copy of your credit report and credit score for free through Experian to see where you stand.
  2. Maintain a clean driving record. Insurance companies view drivers with spotty records as higher-risk and increase their premiums accordingly. Complying with the laws of the road and keeping your driving record clean can help you snag lower rates.
  3. Drop unnecessary coverage. If you have an older car that may not be worth the cost of repairs, weigh removing collision and comprehensive coverage with how much you're willing to spend on potential repairs.
  4. Shop around. Comparing quotes from multiple insurers is one of the best ways to get the lowest rates for which you qualify. Rates can vary significantly between companies, and price comparison sites, like Experian's auto insurance comparison tool, can help ensure you're not overpaying for coverage.
  5. Ask about car insurance discounts. Auto insurance companies typically offer multiple discount opportunities to help customers save. Review available discounts and make sure your insurer applies the ones you qualify for.
  6. Increase your deductible. A deductible is the amount you pay before your insurance kicks in after an incident. Increasing your auto insurance deductible will reduce your premium now—but you'll pay more out of pocket if you have an incident down the road.
  7. Consider usage-based pricing. When you sign up for a usage-based program, you typically must use an app or device that allows the insurance company to collect information about your driving habits. The insurer determines your premium, in part from the data it collects. If you demonstrate safe driving behaviors, you could qualify for a lower rate. But if you engage in unsafe behaviors like speeding, the company may increase your rate.
  8. Drive less. Pay-per-mile insurers can help drivers who put few miles on their car get a lower rate. With these programs, you pay a monthly base rate plus a per-mile fee for each mile you drive to determine how much you pay. You may also pay less for a traditional auto insurance policy if you drive less.
  9. Reconsider your car selection. If you're in the market for a new vehicle, getting an insurance estimate before you buy is a good idea. More expensive cars typically cost more to insure because repair and replacement costs are higher.

The Bottom Line

Many factors contribute to increases in auto insurance rates. Unfortunately, you can't control how inflation impacts the pricing of goods and services. If your budget is feeling the pinch from inflation, the tips above can help you get the lowest auto insurance rate possible. But it isn't something you can do without. Nearly every state in the country requires drivers to maintain car insurance, and skimping on coverage can put you and others at risk. Reducing expenses in other areas can help ease the financial burden of your insurance payments.