U.S. property/casualty replacement costs are currently rising at a slower rate than overall inflation and this trend is expected to persist for the next two years, according to the Insurance Information Institute’s (Triple-I) latest Insurance Economics Outlook. Despite this slowdown in cost increases, it is unlikely to ease upward pressures on insurance premiums, particularly in light of deteriorating underwriting trends and multi-year replacement cost increases. However, it may provide some short-term relief for carriers before surpassing overall inflation again by 2026.

The Triple-I Outlook indicated that the Consumer Price Index (CPI) has dropped 4.1% year-over-year. Nonetheless, the CPI has risen each month since the start of 2024, from 3.1% in January to 3.2% in February and 3.5% in March. This three-month trend does not provide sufficient data to predict whether the year-over-year decline will reverse within this year.

For instance, the CPI rose for three out of twelve months in 2023 (from 3.1% in June to 3.7% in August, and from 3.1% to 3.3% in November) but still ended that year down from 8.0% in 2022 to 4.1% in 2023.

At present, Triple-I anticipates U.S. inflation will remain steady for the remainder of the year, around 3.5%, with a range of fluctuation of approximately ±0.4%.

Between 2019 and 2022, replacement costs for property (such as construction materials and labor rates) increased by an impressive 55%, nearly quadrupling the Consumer Price Index (CPI). It would take a decade of normal inflation – defined as a yearly increase of about 2% – to absorb these significant pandemic-era replacement cost hikes.

"Triple-I forecasts P/C replacement costs to increase 3.2% by 2026, once again faster than overall inflation, ranging from 2.1% and 2.9% that year," stated Michel Léonard, Ph.D., CBE, chief economist and data scientist at Triple-I, in the organization’s May Outlook.

Léonard added that this trend is likely to reverse in 2026. "We expect P/C replacement costs to increase by 1.5% in 2024 and 2.5% in 2025, below overall inflation in both years, and increase by 3.2% in 2026," he said.

Based on Triple-I’s own CPI forecast for comparison, U.S. P/C replacement costs are predicted to grow below overall inflation by an average of 1.75% over the next two years. Using the Federal Reserve's lower inflation forecast as a comparison basis, this spread is reduced to 0.85%. This follows a period where P/C replacement costs grew at a rate significantly higher than overall inflation during and after the pandemic.