By Mark Boada, Senior Editor
Fleet expenses across the board are likely to increase at a slightly faster rate in 2017 than they did last year. While in most areas the hikes are expected to be moderate, in two areas – fuel and accident repairs — they’re expected to outpace the general rate of inflation.
The consensus estimate among economists is that, barring any major global shocks, the U.S. economy is going to grow a bit more quickly this year, at a rate of between 2.1 to 2.6 percent compared to 1.6 to 1.9 percent for all of 2016. Faster growth is also expected to be accompanied by a higher rate of inflation and higher interest rates.
U.S. consumer prices rose just one-tenth of one percent in 2015, but by the end of November last year they had risen by 1.7 percent, and they’re expected to end 2017 another 2.5 percent higher. To fend off inflation, the Federal Reserve raised its overnight lending rate from 0.25 percent to 0.5 percent in December 2015, and to 0.75 percent last month. Economists believe that the Central Bank will raise the rate two or three more times in 2017, ending at 1.25 to 1.5 percent. Correspondingly, all lending rates have been trending higher and will continue moving upward in 2017.
None of this changes the fact that all of the numbers remain below historic averages — inflation has averaged about 3 percent for the past 80 years — but they do indicate that they have already bottomed out and that all figures have started to revert back toward historic norms. Aggravating the situation is that with unemployment already below 5 percent and expected to fall to 4.5, employers are being forced to raise salaries and wages.
All of this means corporate profits will be squeezed in 2017, and fleets will be facing mounting pressure to control expenses even as they watch operating costs on all fronts go higher more quickly from this point onward. Here is a quick look at some of the details:
Acquisition Costs: A Triple Whammy
Kelley Blue Book reported that the average price of a new light vehicle rose 2 percent in 2016, to a record high of $34,948. Expect prices to continue to increase slightly more than the rate of inflation.
Meanwhile, Ford recently guided its 2017 earnings lower because of lower prices for used cars, reflecting that supply has been growing faster than demand. That means new lease contracts this year should reflect lower residual values, at the same time that money factor rates will be pushed higher by the rising trend in interest rates.
Fuel Prices Sharply Higher
Gasoline prices began to rise last year, after reaching a cyclical low of $1.724 for a gallon of regular, according to the U.S. Department of Energy. As of January 2 this year, the price was $2.377, a jump of nearly 38 percent. With OPEC expected to agree to production limits, the department forecasts that prices will continue to rise another 17 percent, ending the year at $2.77, back to around where it was in the summer of 2015 and the fall of 2010.
Maintenance Costs Edging Upward
Routine maintenance costs fell in 2015, but started to rise in 2016 by about 1 percent. Given the higher price of oil and upward pressure on wages for mechanics, fleets should expect to see those costs rise again by that much or a bit more in 2017.
Fleet Accident Expenses
Fleets can expect to pay more for accidents in 2017, driven chiefly by two factors: more accidents and higher severities due to more high-tech auto content.
Traffic fatalities rose 7.1 percent in 2015, and the National Highway Traffic Safety Administration estimates that for the first half of 2016 they rose another 10.1 percent. Meanwhile, the Insurance Institute for Highway Safety (IIHS) reported that from 2014 to 2016 the auto insurance industry experienced an increase of 2.6 percent in collision claims and 2.9 percent in the number of claims for property damage.
At the same time, the IIHS said that accident severities have increased over the past three years to more than 3 percent a year, and have been rising faster than the rate of inflation since 2005, a trend it said it expects to continue in 2017 and beyond. According to CCC Information Services, the increase has been greatest among new vehicles, with repair costs for new and current model year vehicles up by four to five percent for each of the past three years. With ever more electronics and exotic materials in new models, expect that trend to continue in 2017.
Weakness in the economy has had a moderating influence on fleet expenses for the past seven years. The good news is that the U.S. economy should get stronger in 2017. The bad news is it’s going to cost fleets more.
