Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / The Hidden Inflation in Your Car Insurance Bill
Transcript
- Lucas: Luna, I want to talk about something that is quietly driving inflation in a way most people feel every month but almost nobody in Washington talks about. And that's auto insurance. Luna: Oh, I have feelings about this. My premium went up almost 30 bucks last month, and my driving record is clean. What is going on? Lucas: That's exactly the point. Auto insurance premiums are up more than 20 percent year-over-year nationally. To put that in context, overall core CPI is running around 3.4 percent. So this one category is adding roughly half a percentage point to core inflation all by itself. Luna: Half a point. That's enormous for a single line item. What's causing it? Is it just insurers being greedy? Lucas: Part of it is catch-up pricing after years of underwriting losses. But the structural story is more interesting. The cost of repairing a modern car has gone up dramatically. New cars are packed with sensors, cameras, and aluminum body panels that are much more expensive to fix. Average repair cost after a collision is up about 35 percent since 2020. Luna: So it's not just that my car is worth more — it's that fixing it costs more because of all the tech. Lucas: Exactly. And there's a second factor: supply chains for replacement parts are still not fully normalized. Some specialty parts have lead times of weeks, which means rental car costs pile up, and that gets passed back to the premium. Plus, used car prices spiked during the pandemic and stayed elevated, so when a car is totaled, the payout is higher. All of that feeds into the actuarial tables. Luna: And the Fed is looking at this as part of their inflation fight. But can monetary policy actually fix this? Raising rates doesn't make my bumper cheaper to replace. Lucas: That's the key tension. Fed officials like Goolsbee and Kashkari have both said in the last few days that inflation is proving more persistent than expected. But auto insurance is a classic example of what economists call 'sticky' services inflation. It's driven by structural factors — repair costs, labor shortages at body shops, state regulatory approval processes for rate changes. The Fed's tools are blunt here. Luna: So when Kashkari says the inflation fight takes priority, he's essentially saying we're willing to keep rates higher even if it doesn't directly address these supply-side issues. That seems painful for the consumer. Lucas: It is. And you can see the frustration in the sentiment data. Consumer sentiment hit a fresh record low last week, even though the labor market is still adding jobs and GDP grew at 2 percent annualized in the first quarter. People feel the pinch in these everyday costs — insurance, rent, groceries. The macro numbers look okay, but the micro experience is rough. Luna: So what would it take for auto insurance inflation to cool off? Is there a natural ceiling? Lucas: Insurers say we're seeing a return toward profitability after several years of losses. But the cycle usually turns when repair costs stabilize and accident frequency drops. The latter is interesting — accident frequency actually fell during the pandemic, then spiked back as people returned to the roads. It's been moderating, but it's still above pre-pandemic levels. If that normalizes, premiums should grow more slowly. But don't expect a decline — just a slower increase. Luna: Meaning the pain is not going away, but maybe it stops getting worse. That's cold comfort for someone whose premium just jumped 20 percent. Lucas: Right. And this is where the Fed's communication challenge becomes real. If they hold rates high to fight inflation that's partly driven by insurance and rent, they risk crushing the parts of the economy that are rate-sensitive — housing, manufacturing, small business investment. But if they cut too soon, and services inflation stays sticky, they lose credibility. Luna: So they're kind of stuck between a rock and a hard place. And meanwhile, consumers are footing the bill. Lucas: Yeah. And I think one thing worth noting — the core PCE deflator, which the Fed targets, also includes insurance. It's not like they can ignore it. That index rose to 129.3 in March, up from 128.9. It's creeping up. Luna: And the 10-year breakeven inflation rate is at 2.39, which is actually a tad below where it was. So the bond market seems to think this is transitory, or at least that the Fed will eventually win. Lucas: Exactly. Market-based inflation expectations are reasonably anchored. The concern is whether the actual realized inflation data will cooperate over the next few months. If insurance and rent keep pushing core CPI above 3 percent, the Fed will have a hard time cutting even if growth slows. Luna: Switching gears slightly — and I don't mean to change the subject — but looking at this from a personal finance perspective, if our listeners are feeling this insurance pinch, what can they actually do? Shop around? Bundle? Lucas: Absolutely. Loyalty doesn't pay in insurance. Premiums vary wildly between companies for the same driver. The average saving from switching is something like 30 percent. Also, raising your deductible from 500 to 1000 dollars can lower premium significantly. And check if you qualify for usage-based insurance — those telematics programs that track your driving. Safe drivers can save a lot. Luna: Good practical advice. And it ties back to the macro point: when a big component of inflation is driven by industry-specific factors, consumers have to adapt at the micro level. Lucas: Right. And that's what I think is missing from a lot of the Fed commentary. The macro aggregates smooth over these really painful micro realities. But the aggregate matters for policy. So we're in this awkward spot where the economy is doing okay on paper, but households feel like they're treading water. Luna: And the latest JOLTS data showed job openings fell to 6.9 million in March, down from 6.9 million. That's a slow cooling, not a collapse. So the labor market is still tight enough to support spending. Lucas: Exactly. Nonfarm payrolls are at almost 159 million, still growing. But wage growth is only about 3.5 percent annualized, and insurance alone is eating up a lot of that. It's a classic squeeze. Luna: So if this conversation has helped you make sense of why your insurance bill is up — or just made you feel less alone in the frustration — you know, we're here every day trying to connect these dots. If that's worth something to you, we do have a way listeners can support the show. Lucas: Yeah. And it's really simple. If walking through the economy with us has made something click, you can buy us a coffee. Just go to buy me a coffee dot com slash fexingo. That's it. No subscription, no Patreon tiers, no ads in return. Just a way to say this is valuable. Luna: And we genuinely appreciate it. It keeps us going. So, back to the insurance story — one thing we didn't touch on is the regulatory side. In many states, insurance rate increases need approval from the department of insurance. That process can take months, so the rate hikes we're seeing now are actually catching up to cost increases from a year ago. Lucas: Right. And that means even if repair costs stabilize today, premiums could keep rising for another year just due to the lag. So the peak in insurance inflation might be ahead of us, not behind. Luna: That's sobering. So the Fed might be dealing with this particular inflation source for a while. Lucas: Yeah. And I think that's the takeaway: auto insurance is a window into why services inflation is sticky. It's not just about demand overheating — it's about structural costs, regulation, and supply chains. The Fed can't fix that with interest rates. But they'll keep rates high anyway, because they have to be seen doing something. Luna: And meanwhile, we all pay more to drive to work. Great. Lucas: That's the macro memo for today. We'll be back tomorrow with another angle.