Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Why Insurance Premiums Are the New Inflation Signal
Transcript
- Lucas: Last week’s CPI report showed core inflation running at 3.3 percent on an annualized basis — basically in line with expectations. But there’s a number buried in the details that’s been quietly climbing for months and it’s starting to get the Fed’s attention: insurance premiums. Luna: You mean like car insurance and home insurance? Because I just got my renewal notice and I thought my eyes were playing tricks on me. Lucas: Exactly that. Auto insurance premiums alone are up over 20 percent year-over-year according to the April CPI data. Homeowners insurance is up about 15 percent. And unlike food or energy, insurance isn’t something you can just shop around for and instantly save fifty bucks. It’s sticky. Luna: Sticky how? I mean, I switched providers last year and saved maybe 8 percent. But this year my new provider raised rates anyway. Lucas: Right — that’s the stickiness. Insurance companies are repricing risk in real time. On the auto side, it’s a combination of more expensive cars with advanced tech that costs a fortune to repair, plus a spike in accident severity post-pandemic. On the home side, it’s climate-related losses. We’ve had wildfires, floods, hurricanes — insurers are either pulling out of high-risk states or quadrupling rates. Luna: And this feeds into core CPI, which is what the Fed watches most closely. So insurance is actually pushing core inflation higher, even if gas prices level off. Lucas: Exactly. In fact, if you strip out shelter and insurance from core CPI, the annual rate would be closer to 2.5 percent. But shelter and insurance together add about 0.8 percentage points. That’s the gap between where inflation is and where the Fed wants it to be. Luna: So the Fed is stuck. They can’t really lower rates until insurance inflation cools, but insurance inflation is driven by structural factors — climate, car tech, litigation costs — not demand. Lucas: Bingo. Minneapolis Fed President Neel Kashkari said just last week that the inflation fight takes priority because the labor market is in decent shape. But if the inflation is coming from supply-side insurance repricing, rate hikes don’t fix that. They just crush housing and business investment. Luna: Meanwhile, the Iran conflict is adding another layer. CNBC reported the average US household is paying 450 dollars more on gas and energy because of that. That’s headline inflation, but it also feeds into claims costs for insurers — more expensive parts, higher shipping costs for repairs. Lucas: Right — the ‘double scar’ they’re calling it. Past inflation already reset everyone’s expectations, and now geopolitical shocks are keeping input costs high. Insurance companies are still catching up from 2022 and 2023 when they underpriced risk. Luna: So what’s the outlook? Will insurance premiums keep rising at this pace? Lucas: I think the pace moderates later this year, but the level stays elevated. State regulators are approving rate increases more slowly now, and some competition is coming back. But the structural drivers aren’t going away. If you live in Florida or California, you’re looking at another 10 to 15 percent bump next year easily. Luna: And the Fed? They’re watching breakeven inflation rates — the 10-year breakeven is at 2.38 percent, down just slightly from 2.39. That signals the bond market thinks inflation will stay above the Fed’s 2 percent target for a while. Lucas: Yeah, the bond market is basically saying ‘we don’t think you’re going to hit 2 percent anytime soon.’ And insurance is a big reason why. It’s a slow-burn component that doesn’t get the headlines gas or rent get, but it’s just as real for households. Luna: If walking through the economy with us has made something click — like why your insurance bill is up or why the Fed is stuck — the way this show stays ad-free is listener support. It’s a small thing, but it keeps us independent. You can find it at buy me a coffee dot com slash fexingo. Lucas: And we really appreciate that. It lets us keep digging into the numbers that actually affect your daily life. So back to the insurance story — there’s a specific data point I want to highlight. Luna: What’s that? Lucas: The Bureau of Labor Statistics measures insurance premiums using a ‘retained earnings’ method — basically they look at how much insurers are collecting versus paying out in claims. Right now, the loss ratio for auto insurers is about 78 percent, meaning for every dollar in premiums, 78 cents goes to claims. That’s actually improved from 85 percent last year, but it’s still high by historical standards. Luna: So premiums are high because claims are high. And claims are high because repair costs are inflated by supply chains and labor shortages. Lucas: Exactly. And until those repair costs normalize — which requires more auto technicians, cheaper parts, and stable energy prices — insurance inflation will persist. It’s not a demand problem, it’s a supply and cost problem. Luna: Which brings us back to the broader picture: inflation is becoming more fragmented. Some categories are cooling, but others like insurance are heating up for reasons the Fed can’t easily address. Lucas: And that’s the real story of 2026 inflation. It’s not a broad-based overheating. It’s a series of category-specific shocks that compound on each other. The S&P 500 hit 7,580 last week — that’s up 1.4 percent in five days — and gold is at 4,593. Both are pricing in a world where inflation stays above target and the Fed stays on hold. Luna: So what should the average person do? Is there any way to hedge against insurance inflation? Lucas: A few things. First, bundle your policies — same provider for auto and home usually gets a discount. Second, raise your deductible if you can afford to, say from 500 to 1000 dollars. That can cut your premium by 10 to 15 percent. Third, check your credit score — insurers use that in most states. And fourth, shop around every two years, even if it’s a hassle. Loyalty doesn’t pay in insurance anymore. Luna: Good advice. And for investors, insurance stocks have actually been doing well because premiums are rising faster than claims. The S&P insurance index is up about 12 percent this year. Lucas: Right — but that’s a separate conversation. For today, the takeaway is that insurance is the hidden driver keeping core CPI elevated. Next time you hear ‘inflation is cooling,’ check your insurance bill. If it’s still going up, that’s the gap between the macro number and your personal number.