Costs in These Unprecedented Times

We do not believe that residential or commercial structure inflation will abate before early 2023. Why? We review multiple economic forecasts, listen to various and diverse sources of information, and watch the costs of construction materials and labor. Based on these sources of information, here is our list of answers to “Why?”

  • Supply Chain – There are problems, again. China has been in a two month COVID lockdown. Ships were not moving; cargo was not being shipped. The outcome will be higher prices into the fall.
  • Oil – While the prices have moderated, $100 a BBL may be the lowest price for a while. War has many disadvantages. One of them is the disruption of the oil supply and demand balance.
  • Recession – Moody’s estimates it has a 35% probability. Why only 35%?
    • Consumer spending is strong; consumers have cash to spend.
    • Full employment – There are unfilled job openings.

This Moody’s Analytics slide shows the effect of inflation being “released.” It was held down for so long, once released, it will be off to the races—as the expression goes—for a few more months.

  • Autos – The invasion of Ukraine ended steel production in that country. No steel production means no neon gas production. No neon gas, no computer chips. No chips, no cars—among other products. Production can shift to other countries but not quickly or at the same cost.
  • Mortgage rates – They are increasing, which may slow down house purchases. There is still a very low supply of available homes for sale, so it’s unlikely home prices will fall, more likely the rate of price increases will slow.

The Result for Insurance Policies

What does this mean for a residential or commercial insurance policy? It means that inflation for those structures is not slowing down. Our quarterly adjustment for April was a 2.5% increase. That calculates to about 9+% year over year – in addition to the 7+% last year.

I think we (US Citizens) live in two worlds: We want great GDP and we want good wages. We don’t want the things we buy to go up in price, though. We can receive good wages when we have low unemployment, no recession and companies can keep revenues up with the rate of change. A 5% GDP increase is great.

All that comes with some headwinds like inflation, certain shortages, etc. Also, if inflation is 8% and wages are growing at 5%, inflation is only 3%. On top of that, a good portion of people in the US have more money on hand than ever before. Like the lobstermen I knew growing up in Maine, few people will admit that. That’s why gas prices are up, but so is driving. Aviation fuel prices are up, but so are passenger miles. Roads are busy. Hotels are busy. The real pinch points are places like restaurants, skilled labor, things that don’t arrive by truck. That’s construction.

The American Property Casualty Insurance Association (APCIA) survey of homeowners found that about two-thirds have not done anything to check that their policy adjusts to inflation and the higher cost of building materials. Many who upgraded or added onto their homes have not informed or upgraded their policies.

For two years, all we can say is “It’s an unprecedented time.” We are likely to continue saying that for a while.

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