Growth continues, but risks persist

The energy crisis had consumers paying an average of $3.78 per gallon of gas on July 6, according to the American Automobile Association, down from $4.19 a month earlier but up from $3.15 on July 6, 2025. While consumers are certainly paying more for gas now than they did a year ago, the increase has been tempered by extensive use in U.S. and global oil reserves. The International Energy Agency, International Monetary Fund, and others issued a statement in May warning about the potential economic consequences of the record pace of oil inventory drawdowns just ahead of peak summer oil demand.

About 20% of the world’s oil and natural gas passed through the Strait of Hormuz, along with one-third of seaborne fertilizer, before Iran sharply restricted traffic through the waterway in response to U.S. and Israeli strikes in February. While the terms of the recent U.S.-Iran agreement required the reopening of the Strait of Hormuz, the future of the waterway remains in question, and it could take several months before shipping returns to prewar volumes. An April survey by the American Farm Bureau Federation showed 70% of farmers cannot afford all the fertilizer they need, and nearly 60% reported worsening finances.

Consumer core prices, which exclude food and energy, rose a more modest 2.9% in May. Even so, the cumulative weight of higher costs is showing up in the data. Personal income and personal consumption expenditures both increased 0.7% in May, according to the BEA.

Many consumers are spending on credit. Outstanding credit card balances stood at $1.25 trillion in the first quarter, according to the Federal Reserve Bank of New York and Equifax. Delinquent balances of 90 days or more climbed to 13.12%, the highest level since the Great Recession (2007 through 2009).

Medical inflation4 adds another burden. PwC projects that medical costs will grow by 8.5% in 2026, a trend that may persist given the likelihood of reduced federal healthcare spending over the next 10 years. Rising medical costs feed directly into pricing across workers’ compensation, liability, and other insurance lines.

For buyers and insurers, the implications are real: An inflationary environment is compressing margins, and companies that cannot pass through higher energy, labor, and input costs must absorb them. Those that can do so at the risk of dampening demand. Either outcome creates uncertainty that weighs on investment, hiring, pricing, and reserving decisions.

Replacement costs for vehicles and property remain elevated, extending the inflation-driven claims pressure that began several years ago. Higher energy prices feed into auto physical damage through parts and labor costs and into property claims through construction materials and contractor rates. Supply chain disruptions, which are still a factor in certain categories, slow claims resolution and increase severity.

Persistent inflation is likely to keep interest rates higher for longer than many expected, which can support insurers’ investment income but also raises the cost of capital and reinforces underwriting discipline. For insurance buyers, the result is a more uncertain renewal environment as they manage pricing, retentions, and program structure.

Kevin Warsh’s appointment as the new Fed chair introduces a degree of policy uncertainty that markets are still working through. Warsh has long argued that the Fed has become too large, too involved in areas beyond its core mission, and too dependent on quantitative easing and large-scale asset purchases.

Warsh is an advocate of supply-side economic policies, productivity enhancement, and a smaller, more disciplined Fed focused on price stability. His ability to drive change, however, may be constrained by increasingly divergent views among Federal Open Market Committee (FOMC) members amid broader political and economic debates.

That became apparent in June. The FOMC held rates steady at 3.5% to 3.75% at its June meeting, citing elevated inflation driven in part by higher energy prices. However, the FOMC’s June “dot plot,” which indicates where members believe rates should be at the end of the year, suggests the possibility of a rate hike in 2026. Of the 18 participating members, nine projected at least one rate increase, with six signaling perhaps more. The apparent appetite for higher rates represents a marked reversal from the beginning of the year, when most prognosticators anticipated one or more rate cuts in 2026.

The FOMC also announced it would no longer provide forward guidance on policy moves, a shift from recent Fed policy.

Globally, major central banks are holding a similar line. The Bank of England and the European Central Bank left key rates unchanged. The Bank of Japan maintained rates despite three dissenting votes seeking an increase.

For insurers, the rate environment matters on multiple fronts. Higher rates for longer raise questions about reserve adequacy as claims costs continue to climb. Slower growth, tighter credit, and compressed margins flow directly into exposure levels and claims activity, with implications for P&C market conditions through the rest of the year.