Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Why Car Insurance Is Beating the Inflation Slowdown
Transcript
- Lucas: So Luna, I just renewed my auto insurance policy, and I had that moment where you stare at the number and blink a few times, thinking it must be a typo. Luna: How bad was it? Lucas: Twenty-three percent higher than last year. And I haven't had a ticket or an accident in — honestly, I can't remember the last one. Luna: Oof. And you're not alone. The Bureau of Labor Statistics data shows motor vehicle insurance is up about 22 percent year-over-year as of May. Meanwhile, headline CPI is running at 3.1 percent. Lucas: Right, so it's running at roughly seven times the overall inflation rate. And what's interesting is that this isn't a new spike — it's been elevated for two years now. The Fed cuts rates, the economy stabilizes, but your Geico bill keeps climbing. Luna: Why? Lucas: There are three drivers, and none of them are going away quickly. First, repair costs. Modern cars are packed with sensors, cameras, aluminum panels — a minor fender bender that used to cost eight hundred dollars now runs three to five thousand. Second, medical costs in injury claims are rising faster than general healthcare inflation. And third, reinsurance — the insurance that insurance companies buy — has gotten drastically more expensive. Luna: Let's unpack that last one. Reinsurance rates were up something like thirty percent in the last renewal cycle, right? Lucas: Yeah, the big January 2026 renewals saw property-catastrophe reinsurance up thirty to fifty percent, and even auto-focused reinsurance got hit because the models now factor in more severe weather claims and higher litigation costs. So the primary insurers pass that cost down. Luna: Which means the typical driver is subsidizing the guy in Florida who files a claim after every hail storm. Lucas: Basically, yes. Insurance is a pooled risk, and when the pool gets more expensive, everyone pays. Now here is the part that connects to our broader inflation picture: car insurance is one of those 'sticky' services that the Fed's rate hikes don't easily bring down. Luna: Because it's regulated at the state level and priced on loss trends that lag by twelve to eighteen months. Lucas: Exactly. The Fed can raise the fed funds rate to cool demand for cars, but insurers are still paying out claims based on accidents that happened months ago, using parts that are still supply-constrained. The May CPI report showed core services inflation at 5.3 percent annualized, and auto insurance is a big chunk of that. Luna: So even if we get headline CPI down to the Fed's two percent target, your car insurance bill might still be going up eight to ten percent. That feels like a disconnect between the macro data and the household experience. Lucas: It is exactly that disconnect. And it's why central bankers look at core PCE and 'supercore' services excluding housing, but the person listening to us just sees their premium go up again. The 10-year breakeven inflation rate, which is a market-based measure of expected inflation, has actually fallen to 2.25 percent — suggesting bond traders think inflation is heading lower. But that doesn't help you if your specific category is an outlier. Luna: There's also a structural factor: the average age of vehicles on the road is over twelve years now. Older cars are more likely to have claims, and the parts for those models are often discontinued or more expensive. Lucas: Yeah, and you combine that with the fact that new car prices finally started falling — down a bit in 2025 and 2026 — so more people are holding onto their old cars longer, which keeps the risk pool higher. It's a weird feedback loop. Luna: Before we get into whether there's any relief on the horizon, I want to tie this back to something we talk about a lot on this show: the idea that inflation isn't one number. It's a basket, and your personal experience depends on what you buy. Lucas: Absolutely. If you're a renter and you drive a lot, your personal inflation rate is probably two to three points higher than the official CPI. Meanwhile, if you own a home with a fixed mortgage and take public transit, you might be below the official number. Luna: And that's exactly why we do this show — to help people understand the machinery behind those numbers. If walking through the economy with us has made something click for you, and you'd like to support the show staying ad-free and independent, you can buy us a coffee at buy me a coffee dot com slash fexingo. It genuinely helps. Lucas: Yeah, and we appreciate every single one. Now back to that relief question — is there any? I think there are two things to watch. One is that some states, like California and New York, are starting to push back on rate increase requests. Regulators are forcing insurers to justify every percentage point. Luna: But that can backfire, right? If insurers can't get the rates they want, they may just pull out of the market. We've seen that in Florida and Louisiana with property insurance. Lucas: It's a real risk. The other possible relief is technology. Telematics — those little dongles or app-based tracking that monitor your driving — are becoming more common. If you prove you're a safe driver, you can get discounts of twenty to thirty percent. That's essentially a personalized rate that bypasses the pool. Luna: So the person who drives carefully and avoids late-night trips actually gets a break, while the rest of the pool keeps subsidizing riskier behavior. Lucas: Right. And that's a better outcome than blanket increases for everyone. The problem is adoption is still pretty low — maybe fifteen to twenty percent of drivers use telematics. So the average premium remains high. Luna: What about the broader inflation picture? The gold price dropped four percent this week, silver fell nine percent. That suggests some investors are betting inflation is truly cooling. But car insurance isn't following that script. Lucas: Gold and silver are driven by real interest rates and geopolitical risk — and there's a lot of both right now with the Iran situation. But insurance is purely domestic and regulatory. It's almost a parallel economy. So while the macro picture improves, this category will lag. Luna: How long until we see premiums stabilize? Lucas: If repair costs moderate — and that depends on parts supply chains, which are still recovering from the semiconductor shortage and recent shipping disruptions — maybe by late 2027 we see year-over-year increases drop to single digits. But I don't think we'll ever go back to the three percent annual increases we saw in the 2010s. Luna: Because the car itself is more expensive to fix, and that's permanent. Lucas: Exactly. The technology in a 2026 Camry is closer to a 2015 luxury car. Bumpers with radar sensors, headlights that cost a thousand dollars each. That genie isn't going back in the bottle. Luna: So the takeaway for our listeners: if you're shopping for insurance, get quotes from three companies, ask about telematics discounts, and consider raising your deductible if you have an emergency fund. But don't expect your bill to shrink any time soon. Lucas: And when you see the next CPI report that says inflation is down to two and a half percent, remember that your own numbers might tell a different story. That's not the data lying — it's the basket not matching your life. Luna: Alright, next episode we'll look at another category that's defying the trend. Until then, keep an eye on those renewal notices. Lucas: And maybe drive extra carefully.