Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Why New Car Prices Are Falling While the Cost To Insure Them Spikes
Transcript
- Lucas: New cars are getting cheaper. That's not a headline you hear often these days, but it's true. The average transaction price on something like a Toyota Camry is down about 3 percent from a year ago. Luna: Wait — dealer lots are finally discounting? I feel like we've been hearing about supply shortages and markups for years. Lucas: Right, and that story is definitely shifting. The May CPI report, which came out just a few days ago on June 10, showed new-vehicle prices actually fell 0.5 percent month over month, and they're down 2.6 percent annually. That's the biggest year-over-year drop since early 2020. Luna: So what changed? Is it just that inventory finally caught up? Lucas: Inventory is part of it. Chip shortages have eased, production lines are running closer to normal, and manufacturers are offering incentives again — cash back, low-rate financing, that sort of thing. But there's another side to this coin that's much less pleasant. Luna: Let me guess — insurance. Lucas: Exactly. While new cars themselves are getting cheaper, the cost to insure them is exploding. Motor vehicle insurance in the May CPI was up 22 percent year over year. That's not a typo. Twenty-two percent. Luna: That's huge. And it's not just new cars, right? That covers all vehicles. Lucas: It does. But the mechanics of why insurance is spiking are actually connected to why new car prices are falling. Counterintuitive, I know. Luna: Walk me through it. Lucas: So, new car prices are coming down because supply is improving. But the cars rolling off assembly lines today are packed with more technology than ever — sensors, cameras, infotainment screens, advanced driver-assistance systems. That makes them much more expensive to repair. Luna: Right — a fender bender that used to cost eight hundred dollars to fix now needs a bumper with embedded radar sensors, and suddenly it's three grand. Lucas: Exactly. And it's not just the parts. Labor rates at repair shops have gone up, and there's still a backlog from the pandemic. Plus, used car prices, while off their peaks, remain elevated, which means insurers are paying out more when a car is totaled. Luna: So the insurance companies are playing catch-up. They underpriced policies when repair costs were stable, and now they're jacking up premiums to make up for lost ground. Lucas: That's the story in a nutshell. And the effect on consumers is real. If you bought a new car last year, you might be paying less for the car itself — maybe two or three hundred dollars less on the transaction — but your insurance premium could be up four or five hundred annually. Luna: So net, you're still losing. That's not deflation, that's just inflation shifting categories. Lucas: Right. And this is where the CPI as a headline number can be misleading. Headline CPI in May was 4.2 percent annually. That's high. But inside that number, you've got goods deflation — new cars, used cars, electronics — and services inflation that's sticky. Insurance is one of the stickiest. Luna: And the Fed watches core PCE more closely, but insurance is in there too. So how does this affect the rate picture? Lucas: Well, the Fed's preferred measure, the core PCE price index, was at 129.6 in April, up from 129.32. That's still rising, just slowly. But insurance costs are a lagging indicator — they react to repair costs and medical costs and legal costs from a year or two ago. Luna: So even if new car prices keep falling, insurance could keep rising for another year or more. Lucas: That's the concern. And it means that the 'good deflation' in goods isn't necessarily giving consumers more breathing room. It's being offset by these service-side pressures. The Fed has to decide whether to look through that. Luna: Let's zoom in on one specific data point. J.D. Power tracks average transaction prices — what do those show? Lucas: J.D. Power's data for May put the average transaction price for a new vehicle at about forty-seven thousand dollars. That's down roughly three percent from a year ago. But incentives have risen to about 7 percent of the average transaction price, up from 4 percent a year ago. Luna: So manufacturers are basically buying down the price with rebates and cheap financing. That's a sign they need to move metal. Lucas: Absolutely. Inventory on dealer lots is up to about sixty days' supply, which is getting back to pre-pandemic levels. And with interest rates still relatively high — the Fed funds rate is at 3.63 percent — financing a car is expensive. So they have to offer deals. Luna: Meanwhile, insurance companies are dealing with their own cost pressures. I saw that State Farm and Allstate both reported underwriting losses last year. They're not making money on the insurance side. Lucas: Right. The combined ratio for auto insurers has been above 100 — meaning they pay out more in claims and expenses than they collect in premiums. So they're raising rates aggressively. Some states have seen rate filings of 15 to 25 percent. Luna: And this is where the CPI might actually understate the pain for consumers. The CPI for motor vehicle insurance is based on a sample of premiums, but it doesn't capture the fact that many people are being forced to switch insurers or reduce coverage to afford it. Lucas: That's a really important point. The CPI is a fixed basket — it assumes you keep the same policy with the same company. In reality, people shop around, drop comprehensive coverage, or drive uninsured. So the actual out-of-pocket increase for many households could be higher than 22 percent. Luna: Yeah, that makes sense. And this divergence — cheap goods, expensive services — is a huge challenge for the Fed. If they focus on goods deflation, they might think inflation is under control. But consumers are still feeling squeezed. Lucas: Exactly. And that's why listening to this show and understanding how these pieces fit together matters. If walking through the economy with us has made something click, or helped you make a smarter decision with your own money, that's exactly why we do it. Luna: And if you've gotten value from it, a couple of dollars a month genuinely goes a long way to keeping these episodes ad-free and independent. Lucas: Yeah. You can support the show at buy me a coffee dot com slash fexingo. Truly, it makes a difference. Luna: All right. So back to the insurance story — one thing I want to dig into is whether this trend is temporary or structural. Lucas: I think it's mostly structural. The complexity of modern cars isn't going away. EVs, in particular, are even more expensive to repair because of the battery packs and specialized parts. So the repair cost base is permanently higher. Luna: But won't insurers eventually adjust and stabilize rates once they've caught up? Lucas: They will, but it takes time. Rate filings have to be approved state by state. And in the meantime, if repair costs keep rising — which they are, because parts inflation is still running hot — then insurers will keep raising rates. The wholesale price index for May, released yesterday, showed a 1.1 percent monthly jump, driven by energy. That feeds into transportation and logistics costs for parts. Luna: So we're looking at a multi-year adjustment. And that means the gap between what you pay for the car and what you pay to keep it on the road is going to widen before it narrows. Lucas: Exactly. And for anyone budgeting right now, that's a real consideration. If you're in the market for a new car, the lower transaction price might look tempting, but factor in the insurance hike. It could easily eat up the savings. Luna: And the broader takeaway for the inflation picture is that we can't just celebrate falling goods prices. The services side is where the real pressure is. Lucas: Right. The 4.2 percent headline number gets the attention, but the composition matters more. If insurance and rent and medical care keep rising, the Fed can't declare victory. And consumers won't feel like inflation is over. Luna: So what's the one thing you want listeners to remember from this episode? Lucas: That inflation isn't one number. It's a collection of diverging trends. New cars are deflating, but insurance is inflating. And the net effect on your wallet depends on which part of the economy you interact with most.