Impact of Inflation on Car Allowances

Car Allowance

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If you’ve been keeping an eye on your finances lately, you’ve likely noticed how inflation is impacting almost everything around us — especially when it comes to car ownership. The cost of owning a vehicle — from new cars to used ones — has skyrocketed to almost prohibitive levels.

A double whammy - auto insurance and interest rates

Auto insurance rates have been a hot topic, with insurance companies blaming rising repair costs, more expensive replacement parts, and increased risk post-pandemic as reasons for all these hiked premiums. It’s not just you — insurance premiums have been going up and up across the board, making it even more costly to own and maintain a vehicle. Meanwhile, interest rates have climbed, meaning if you’re financing a new car, you’re paying a lot more than you would have just a few short years ago. These factors combined create a significant burden, especially for businesses managing fleets or reimbursing employees for business miles.

Car allowances and fuel costs

Inflation has also spurred fluctuations in fuel prices. Gasoline has always been a volatile expense, with gas prices swinging dramatically based on factors beyond anyone’s control, like global supply chain issues and geopolitical tensions — you name it. For businesses that offer car allowances or mileage reimbursement, these fuel cost fluctuations make it really tough to establish a fair, stable rate. The IRS adjusts its mileage rate annually, but businesses have to carefully consider how inflation impacts this rate and what it means for employees who are driving for work.

Lots and lots of companies that offer a cents per mile reimbursement model or provide a FAVR (Fixed and Variable Rate) reimbursement model have seen these systems really stretched to their limits. With gasoline prices soaring and the cost of vehicle ownership rising, the old mileage rates just aren’t cutting it. This leaves companies scrambling to adjust their reimbursement policies to better align with the actual costs employees face on the road.

Depreciation and vehicle maintenance

When thinking about the cost of owning a vehicle, depreciation isn’t often considered, but it’s a significant factor — especially now, with inflation on the rise. New vehicles have spiked in price, but used cars aren’t far behind. If you’ve tried to sell or trade in a vehicle recently, you know that used car prices are also through the roof. This means that employees driving for work face higher upfront costs whether they’re purchasing new or used cars, and as the value of their vehicles depreciates faster, they end up losing more money in the long run.

Vehicle maintenance costs are another area really impacted by inflation. As parts become more expensive and labor costs rise, even little repairs or maintenance can take a big chunk out of a car allowance or reimbursement model. For companies managing a fleet of vehicles or reimbursing employees for their personal cars, these increases in repair costs and vehicle maintenance can make familiar or traditional reimbursement models unsustainable.

The Consumer Price Index and bottom lines

The Consumer Price Index (CPI) measures the average change in prices over time for a basket of goods and services. The rising inflation rate, reflected in the CPI, shows us just how much more expensive life has become for the everyday Joe and Jane, who happen to be vehicle owners. Whether it’s rising insurance rates, fuel costs, or maintenance expenses, the average cost of keeping a car on the road has gone up pretty dramatically. And the Bureau of Labor Statistics has confirmed this trend is – unfortunately – not slowing down anytime soon.

For businesses offering car allowance programs, the bottom line is simple: traditional reimbursement methods might no longer cover the real expenses incurred by mobile employees. In super expensive states like California, where both car insurance costs and fuel prices are among the highest in the nation, this is even more of a challenge.

What can businesses do?

With inflation pushing up the cost of car ownership, companies need to rethink their approach to vehicle reimbursement. One option is to adjust mileage logs and mileage reimbursement policies to reflect the true cost of driving. Another is to consider a tax-free vehicle allowance program that adjusts to the current economic climate, ensuring that employees aren’t left paying out-of-pocket just to do their jobs.

To make things more cost-effective, businesses should also consider the pros and cons of offering a company car versus a reimbursement. While vehicle reimbursement programs like FAVR can help cover both fixed and variable costs, companies must stay ahead of inflation trends and ensure their programs are adaptable to economic changes.

FAVR combines a fixed allowance with a variable mileage rate, reflecting the real costs employees pay while driving for work. As fuel, maintenance, and depreciation expenses fluctuate, FAVR adjusts to match these changes, ensuring fair reimbursement without overpayment. Unlike other car allowances, which may become poor excuses for reimbursement during inflation spikes, FAVR’s dynamic nature requires employers to keep up with economic volatility, providing a more accurate, tax-free alternative.

The bottom line

Inflation affects everyone across the US and the world, but it has a particularly large impact on businesses and employees who rely on driving to get the job done. With repair costs, insurance premiums, and fuel costs all rising, it’s becoming harder to sustain traditional car allowance and reimbursement programs. The good news? By staying informed and adjusting policies to match the current climate, businesses can still support their mobile workforce without breaking the bank.

It’s all about adapting to the new reality, so whether you’re tracking business mileage, offering a variable rate car allowance, or considering the switch to a tax-free vehicle reimbursement plan like FAVR, now is the time to rethink how you support employees on the road.