Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / How the CPI Captures Your New Car Insurance Spike
Transcript
- Lucas: So the May CPI came out a few weeks ago — headline number 334.0, up from 332.41 in April. Core CPI, which strips out food and energy, hit 336.1. And there's one component inside that core number that feels like it's hijacking the whole index. Luna: Let me guess — motor vehicle insurance. Lucas: Exactly. The Bureau of Labor Statistics reported that motor vehicle insurance is up over 20 percent year-over-year. That's not a rounding error. And because the CPI weights insurance at roughly 2.5 percent of the total basket, a 20 percent jump adds about half a percent to headline inflation all by itself. Luna: And that half a percent is precisely the kind of persistent services inflation the Fed keeps pointing to when it holds rates steady. Lucas: Right. And I think this is a useful window into how the CPI actually works — because a lot of people see insurance premiums spike and assume the number must be wrong, or that it's an outlier. But the CPI is designed to capture exactly this: what you actually pay. And your insurance bill is surging. Luna: Which raises the question — why? Is this just higher repair costs and more expensive parts, or is there something structural underneath it? Lucas: Both. Repair costs have been elevated since the pandemic — labor, parts, longer loan times mean cars are on the road longer. But there's also a reinsurance dynamic. Reinsurers — the companies that insure the insurers — have been jacking up their rates because of climate-related losses and litigation trends. That cascades down to your premium. Luna: So if you're a listener thinking 'my insurance went up 30 percent and inflation is supposedly cooling' — it's not that the CPI is wrong, it's that your personal basket is overweight auto insurance right now. Lucas: Exactly. And the CPI's national average is an average. If you live in Florida or California, your insurance costs are crushing the national number. But even at the national level, this one line item is doing serious work in keeping core services inflation elevated. Luna: And it's worth saying — if breaking down these numbers is useful to you, episodes like this stay ad-free because of listener support. If you find yourself thinking about this stuff after the episode ends, buy me a coffee dot com slash fexingo is the way to keep that going. Lucas: It genuinely helps. And we don't run ads, so it's the main way people know this show exists and matters. Appreciate it. Luna: Alright, back to the numbers. So the CPI weights — where does the BLS get the 2.5 percent figure for insurance? Lucas: It comes from the Consumer Expenditure Survey — thousands of households track every dollar they spend. Then the BLS calculates what share of total spending goes to motor vehicle insurance. That weight gets updated every two years. The current weight reflects spending patterns from 2021 and 2022, so it's a little behind, but it's the most systematic measure we have. Luna: And that 2.5 percent weight means insurance has more influence on core CPI than, say, airline fares or even college tuition. Lucas: More than college tuition, absolutely. So when the Fed looks at core services inflation — which is running well above their target — auto insurance is one of the biggest culprits. And it's not responding to higher interest rates the way housing or durable goods might. You don't stop driving because rates are high. Luna: Which brings us back to the Fed's problem. The May CPI report, with core at 336.1, didn't give them cover to cut. And the 10-year breakeven inflation rate, which is the market's forecast for average inflation over the next decade, sits at 2.25 percent. That's down slightly from 2.26, but still above the Fed's 2 percent target. Lucas: Right. And the breakeven is actually a useful check on the CPI story. It suggests markets expect inflation to moderate gradually, not collapse. So the Fed is in a holding pattern. Kevin Warsh's first meeting as Fed chairman earlier this month ended with rates unchanged — the effective federal funds rate was 3.63 percent in May, basically flat from April. Luna: So no cuts soon. But if auto insurance starts to slow — and there are early signs that repair cost inflation is easing — does that change the calculus? Lucas: It could, but slowly. Insurance rates are sticky. They reset annually for most people, so even if underlying costs level off, your premium might not drop. The CPI for insurance might stop accelerating, but it's unlikely to fall quickly. That means core services inflation stays elevated for at least another year. Luna: And if you look at the broader picture — PCE, the Fed's preferred measure, hit 130.9 in April. Core PCE at 129.6. Both are up. So it's not just CPI telling this story. Lucas: Exactly. The PCE uses a different weighting methodology — it captures substitution effects better — but it's showing the same pattern: goods inflation is mostly tamed, services inflation is stubborn. And auto insurance is a poster child for that. Luna: So what should listeners actually do with this? Besides possibly shopping around for a better rate? Lucas: Shopping around helps, but the structural drivers are bigger than any one insurer. The real takeaway is: when you hear 'core services inflation,' don't think of some abstract category. Think of your insurance bill, your rent, your medical premiums. Those are the things keeping rates high. And until those lines start to bend, the Fed stays put. Luna: And for investors, that means the rate-cut timeline keeps getting pushed out. The S&P 500 is at 7,471, down a bit over the last five days. The market is pricing in higher for longer. Lucas: Right. And the NASDAQ is off nearly 2 percent in the last five days. When rate cuts keep getting delayed, growth stocks — which are valued on future earnings — tend to feel it first. So this insurance data point has ripple effects well beyond your monthly budget. Luna: One more thing — the gold price has pulled back too. Gold futures at $4,206, down almost 3 percent over five days. That suggests some inflation expectations are easing, even if the CPI itself is still elevated. Lucas: That's a good point. Gold is often a bet on inflation or uncertainty. The pullback might reflect the market's view that inflation is peaking — or at least that the Fed won't let it run away. But it's early. Luna: So the bottom line: auto insurance is a small part of your budget but a big part of the inflation story. And it's not going away soon. Lucas: Yeah. The next CPI release is in July. If motor vehicle insurance growth starts to slow, that's a real signal. If it accelerates again — we're in for a longer wait.