Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Why Your Insurance Bill Wont Cool With CPI
Transcript
- Lucas: Your homeowners insurance premium just went up again. Maybe 12 percent, maybe 20. And your auto policy isn't far behind. Meanwhile, headline CPI is running around 3 percent annualized. So what gives? Luna: It feels like a disconnect. The macro numbers say inflation is cooling, but that renewal letter says otherwise. Lucas: Right. And the disconnect is structural. Insurance is one of those categories that's heavily influenced by lagging data and localized shocks. So even as the Fed pats itself on the back for getting CPI down from 9 percent to around 3, insurance keeps climbing at double-digit rates. Luna: Let's talk about why. What's driving it? Lucas: Start with the obvious one: climate. The National Oceanic and Atmospheric Administration reported that in 2025, the US had 28 billion-dollar weather disasters. That's up from an average of about 18 a decade ago. Insurers paid out record claims, and they're still catching up. Luna: So they raise premiums to rebuild their reserves. But that's not the whole story, right? Because even in states without major hurricanes, rates are going up. Lucas: Exactly. That's where reinsurance comes in. Primary insurers buy their own insurance from global reinsurers like Munich Re and Swiss Re. Those reinsurers took massive losses from 2023 to 2025, so they jacked up their rates by 30 to 50 percent. That cost gets passed straight to you. Luna: And because it's a global market, a flood in Germany or a wildfire in Canada affects your premium in Ohio. Lucas: Precisely. Then there's the regulatory piece. States like Florida and California have been in a weird standoff. In Florida, insurers have been pulling out or going insolvent because of hurricane risk. The state created a backup insurer of last resort called Citizens, but it's underfunded and has been raising rates aggressively. In California, regulations have historically limited how much insurers can raise premiums based on future risk — they could only use past data. But that's changing. Luna: I saw that California just approved a new rule allowing insurers to use catastrophe models for rate-setting. That's a big shift. Lucas: Huge. It means premiums could jump significantly once companies file their new rate plans. The logic is that by pricing risk more accurately, you keep insurers in the market. But the short-term effect is higher bills. Luna: And with auto insurance, what's the story? Is it just more expensive cars and repairs? Lucas: Partly. The average new car price is still around $48,000. Repair costs have gone up because cars have more sensors and cameras. But there's also a social inflation angle — more lawsuits and larger jury awards for auto accidents. The Insurance Information Institute says bodily injury claim severity rose about 8 percent in 2025. Luna: So all of these costs are embedded in the CPI, but they're weighted by how much the average household spends on insurance. And that weight might be understated. Lucas: That's the key insight. In the CPI basket, insurance has a relatively small weight — about 3 percent for all types combined. So even if auto insurance jumps 15 percent, it only adds about 0.45 percentage points to headline inflation. But for a family paying $2,500 a year for auto and $1,500 for homeowners, that 15 percent is real money. Luna: And if you look at core CPI, which strips out food and energy, it was at 336.1 in May, up from 335.42 in April. That's still a monthly increase of about 0.2 percent. So services inflation — which includes insurance — is sticky. Lucas: Sticky is the right word. And the bond market seems to agree. The 10-year breakeven inflation rate, which is the market's expectation for average inflation over the next decade, sits around 2.21 percent. That's down a bit from earlier in the year, but it's still above the Fed's 2 percent target. And it suggests that the market sees this insurance-driven pressure as persistent, not transitory. Luna: So the Fed can't just declare victory and cut rates aggressively. Because even if goods inflation is gone, services inflation — especially insurance — keeps the pressure on. Lucas: Exactly. And that's the dilemma heading into the second half of 2026. The Fed funds rate is at 3.63 percent, and the market is pricing in maybe one or two cuts by year-end. But if insurance premiums keep rising at double-digit rates, that could keep core services inflation elevated. Luna: And it's not just insurance. Other services like rent and medical care are also sticky. But insurance feels more volatile because it's influenced by these big, infrequent shocks. Lucas: One thing I find interesting is how insurers are using technology to respond. Some are deploying AI models that analyze driving behavior in real time — telematics — to set individual rates. So your premium might be based on how hard you brake, not just your age and zip code. Luna: Which could actually help some people get lower rates if they drive safely. But it also raises privacy questions. Lucas: Absolutely. And the broader point is that insurance pricing is becoming more granular and more dynamic. That means the CPI might have a harder time capturing what people actually pay, because it samples a fixed basket of policies. The disconnect could widen. Luna: So what's the takeaway for someone listening? If you're budgeting for next year, should you expect another double-digit increase? Lucas: Probably. I'd say plan for at least a 10 percent increase in homeowners and maybe 8 to 12 percent for auto. Shop around, but don't expect huge savings — the market is repricing risk across the board. And keep an eye on your state's regulatory environment, because that's where the biggest changes are happening. Luna: It's one of those areas where the macro story and the micro reality diverge. The Fed sees inflation cooling, but your mailbox tells a different story. Lucas: And that's exactly why we do this show — to connect those dots. If going through the economy with us has made something click, maybe it's worth supporting the show. We keep it ad-free on purpose, and listener support is what makes that possible. You can find us at buy me a coffee dot com slash fexingo. Luna: Yeah, it's a small way to keep the conversation going without any sponsors calling the shots. Lucas: Alright, so on that note — let's look ahead. What happens if California's new catastrophe model approval leads to a wave of rate filings that push premiums up 20 percent? Does that change the inflation narrative in 2027? Luna: It could. Especially if other states follow California's lead. We might see insurance become a bigger driver of core inflation in the next couple of years. Lucas: And that's something the Fed will have to factor in. Because if insurance adds a persistent 0.3 to 0.5 percentage points to core CPI each year, getting back to 2 percent becomes even harder. Luna: So maybe we should do a follow-up in six months, after we see some of those rate filings come through. Lucas: I like that. We'll track it. For now, the bottom line is: insurance is the inflation that doesn't quit, and it's written into the structure of the market. Thanks for listening — we'll be back next time.