Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / Why Stagflation Is Reshaping the Insurance Industry
Transcript
- Lucas: So you look at the May CPI and PCE numbers that came out last month, and on the surface, inflation is cooling. Headline CPI is still around 3.3 percent, core PCE is 2.6 — not great, but trending down. But there's this one category that's still running hot, and it's one of those unavoidable costs that really hits households: insurance. Luna: Right. I saw a stat last week — auto insurance premiums are up something like 15 percent year-over-year. And homeowners insurance even more in some states. Lucas: Exactly. The Bureau of Labor Statistics data shows motor vehicle insurance is up roughly 14.5 percent over the last twelve months, and homeowners insurance is up about 11 percent. And this isn't a one-month blip. This has been persistent for two years now. Luna: Why? I mean, used car prices have come down. New car supply chains are mostly fixed. Shouldn't insurance costs be easing too? Lucas: You'd think so, but insurance is a lagging indicator. What's driving it is the cumulative inflation in the parts and labor that go into repairing cars and homes. Even if new car prices stabilize, the cost of a replacement bumper or a side mirror has gone up, and body shop labor rates have risen because mechanics are scarce. All those claims from 2023 and 2024 are still being paid out now. Luna: So insurers are catching up on pricing. They lost money on those claims, so they're hiking premiums to rebuild margins. Lucas: Precisely. And there's a second layer: reinsurance. That's the insurance that insurers buy to cover catastrophic losses. After a string of hurricanes, wildfires, and severe storms, global reinsurance rates have spiked. That cost gets passed down to consumers. Luna: I've heard about insurers pulling out of Florida entirely. Some companies just stopped writing new homeowners policies there. Lucas: Florida is the extreme case, sure. But even in states without major natural disasters, premiums are rising because the reinsurance market is global. A hurricane in the Gulf of Mexico pushes up costs for a homeowner in Ohio. Luna: That feels like a hidden inflation tax on property ownership. Lucas: It really is. And look — I think there's something worth saying here. A lot of the economic commentary we see focuses on big macro numbers, but this insurance squeeze is exactly the kind of thing that makes people feel like the economy isn't working for them, even when headline inflation comes down. Luna: Yeah. And it's not something you can easily shop your way out of either. Switching insurers might save you 5 percent, but not 15 percent. Lucas: Right. And that's the kind of conversation we try to have on this show — connecting the data to what actually hits your wallet. If walking through the economy with us has made something click for you, it genuinely helps if you show that. A couple of dollars a month is what keeps these episodes ad-free and independent. Luna: It's little things. A coffee. It adds up. And those small contributions really do make a difference for a show like this. Lucas: Yeah. So if that feels right, buy me a coffee dot com slash fexingo. No pressure. Now, back to the insurance trap — let's talk about what happens next. Luna: Are we at peak insurance inflation? Or is there more to come? Lucas: I think we're closer to the peak than the start. Auto insurance premium growth actually ticked down slightly in the May CPI data — from 1.6 percent month over month to 1.2 percent. That's still high, but the direction is good. Luna: So maybe by the end of 2026 we start to see some relief. Lucas: Maybe. But there's a structural issue: the labor shortage in auto repair and construction isn't going away anytime soon. Average hourly earnings in the private sector are up to $37.60 as of June, and those wage gains are concentrated in service and repair jobs. That keeps claims costs elevated. Luna: So even if parts inflation fades, labor costs remain sticky. Lucas: Exactly. And then you have the climate piece. Reinsurance rates are unlikely to come down if the frequency of billion-dollar disasters keeps increasing. That's a multiyear reset in pricing. Luna: Which means the 'insurance squeeze' might not be a temporary phenomenon. It could be the new normal. Lucas: That's the uncomfortable takeaway. For the typical family, their biggest assets — a car, a home — just got more expensive to protect, and that cost isn't going away quickly. It's essentially a regressive tax: it eats a larger share of income for lower and middle households. Luna: And it feeds into the broader stagflation narrative — you've got slow growth, but costs that are structurally higher. Lucas: Right. Real GDP growth was just 2.1 percent annualized in Q1. Not terrible, but not strong enough to offset these cost pressures. And the job market is cooling — June payrolls came in at only 57,000. So you've got slower hiring, but insurance premiums keep climbing. Luna: That's the squeeze. Less income growth, but a fixed cost that's rising faster than inflation overall. Lucas: So what do households do? For some, it might mean adjusting coverage — higher deductibles, dropping comprehensive on an older car. But that's a gamble. Others might delay buying a home because the total cost of ownership, including insurance, is just too high. Luna: And that feeds back into slower economic growth. Less housing turnover, less spending on car repairs and maintenance. Lucas: Exactly. It's a feedback loop. And that's why I think this insurance story is a bigger deal than most people realize. It's not just a line item on a budget — it's a drag on mobility and consumption. Luna: So if you're an investor, are insurance stocks a good bet here? They're raising premiums, so margins should improve. Lucas: They should, but there's a risk that regulators push back. Some state insurance commissioners are already holding hearings on rate increases. And if the political pressure leads to rate caps, margins get squeezed again. Luna: So it's not a clear-cut trade. Lucas: No. But if you look at the big picture, this episode is a reminder that stagflation isn't just about the CPI number. It's about these specific, sticky costs that resist the normal cycle. Insurance is one of the most stubborn. Luna: And one of the most personal. Lucas: Right. So the next time you see your premium renewal, you'll know exactly why it's going up — and why it might not come back down anytime soon.