Property/casualty replacement costs in the U.S. are increasing at a slower pace than overall inflation and will likely continue to do so for the next 24 months, according to the Insurance Information Institute’s (Triple-I) latest Insurance Economics Outlook.

The slowdown in cost increases is unlikely to relieve upward pressures on insurance premiums, especially given deteriorating underwriting trends and multi-year replacement cost increases, though it may alleviate some pain for carriers in the short run before overtaking overall inflation again by 2026, the Outlook noted.

While the Consumer Price Index (CPI) is down 4.1 percent year-over-year, there has been an increase each month since the beginning of 2024, from 3.1 percent in January to 3.2 percent in February and 3.5 percent in March, analysis showed.

The report indicates this is not enough to determine whether the year-over-year decline will reverse course this year.

Triple-I expects U.S. inflation to remain flat for the rest of the year, at around 3.5 percent with a range of 0.4 percent above and below this estimate.

Replacement costs for property (e.g., construction materials, labor rates) rose 55 percent between 2019 and 2022, nearly four times the Consumer Price Index (CPI).

It will take 10 years of normal inflation – defined as 2 percent per year – to absorb the pandemic era’s replacement cost increases, Triple-I stated.

P/C replacement costs have grown 1.5 percent year-to-date in 2024, below overall inflation of 3.5 percent.

Lower replacement costs for motor vehicles, especially used autos, pushed replacement cost increases for commercial auto and personal auto to the lowest of the P/C lines.

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

Léonard noted that this trend will likely reverse in 2026.

“We expect P/C replacement costs to increase by 1.5 percent in 2024 and 2.5 percent in 2025, below overall inflation in both years, and increase by 3.2 percent in 2026,” Léonard said.

Using Triple-I’s own CPI forecast as the basis for comparison, U.S. P/C replacement costs are expected to grow below overall inflation by an average of 1.75 percent over the next two years.

Using the Fed’s lower inflation forecast as a basis for comparison, this spread is 0.85 percent, the report noted. This is after P/C replacement costs grew at a multiple of overall inflation during and after the pandemic.

“One caveat to the findings is a threat of resurging inflation due to geopolitical risks including Russia-Ukraine, China-Taiwan, India-China, global food prices, supply chain disruptions, trade wars, and the U.S. elections,” Léonard said.