Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / How Your Car Insurance Is Still Rising Despite Lower CPI
Transcript
- Lucas: So the June CPI came in with headline inflation at 2.9 percent, down from 3.1, and a lot of the media coverage focused on how grocery prices are finally moderating. But there's one line item that has barely budged, and it's hitting millions of households directly: car insurance. Luna: Yeah, I just got my renewal notice and it was up almost 9 percent. Felt like a gut punch, especially when everything else seems to be easing. Lucas: Exactly. And the data backs that up. The June CPI report shows auto insurance is still running at an 8.2 percent year-over-year increase. That's more than double the headline rate. And it's one of those categories that the Fed watchers call 'sticky' — it doesn't drop quickly even when broader inflation cools. Lucas: Look, if walking through the economy with us has made something click, we'd love to keep this show independent and ad-free. A couple of dollars a month genuinely makes that possible — buy me a coffee dot com slash fexingo, if you've gotten something out of these episodes. Luna: Yeah, it's a small thing that adds up. And we really appreciate it. Lucas: So why is car insurance so stubborn? The first reason is repair costs. Cars are more complex now — sensors, cameras, aluminum body panels. Even a minor fender bender can cost thousands. And those repair costs feed directly into premiums. Luna: Plus the parts themselves. A lot of them come from China, and import prices for goods from China just hit their highest level since 2008, according to the data from last week. That's got to be pushing up replacement part costs. Lucas: Right. The import price index for Chinese goods spiked, and that's a big deal for insurers. If a bumper or a headlight assembly costs 15 percent more, that gets priced into your next renewal. And it's not just parts — labor rates at body shops have been climbing too. Luna: So there's a lag effect. The headline CPI drops, but insurance rates are based on claims data from months ago, and those claims are still expensive. Lucas: Exactly. Insurers set premiums based on trailing loss ratios. So even if repair cost inflation slows tomorrow, your premium might keep rising for another six to twelve months. The CPI for auto insurance is a rearview mirror. Luna: And it's not just repair costs. There's also the frequency of claims. With more people driving post-pandemic, and more accidents — especially severe ones — the pool of claims is bigger. Lucas: The data from the Federal Reserve's latest Beige Book, which came out last week, noted that some districts reported an uptick in auto insurance claims. And that aligns with what we're seeing nationally. More miles driven, more accidents, more payouts. Luna: So the combination is: higher repair costs per claim, plus more claims. That's a double whammy. Lucas: And then there's the reinsurance market. Insurers buy their own insurance — reinsurance — to cover big losses. Reinsurance rates have been rising because of climate-related catastrophes. That cost gets passed down. Luna: So a hurricane in Florida or a hailstorm in Texas ends up affecting my car insurance in Chicago? That's indirect, but yes. Lucas: Exactly right. The whole system is interconnected. And one more factor: used car prices. They've been elevated, and when a car is totaled, the insurer has to pay out more. That's still feeding through, even though used car prices in CPI have started to dip. Luna: So there's this long tail of causes. It's not one thing. But the net effect for consumers is that their insurance bill is one of the most stubborn inflation items right now. Lucas: And it's a big chunk of the core services inflation that the Fed is watching. Core CPI ex food and energy is still running at 3.0 percent. Auto insurance is a meaningful part of that stickiness. Luna: What can people actually do about it? Besides the obvious shopping around. Lucas: Shopping around is the number one move. The same coverage can vary by hundreds of dollars between insurers. Also, consider raising your deductible if you have an emergency fund. And check for discounts — usage-based programs, good driver discounts, bundling. Luna: But some of these increases are just structural. We're not going to see auto insurance CPI drop to zero anytime soon. Lucas: No, I think it'll be a gradual moderation. If repair cost inflation slows and claims frequency normalizes, we could see year-over-year increases dip below 5 percent by late 2027. But it's not going to happen overnight. Luna: So the headline CPI drop is real, but it's uneven. And car insurance is one of those categories where the relief is delayed. Lucas: Right. And that's worth remembering when you hear 'inflation is down' — your personal inflation rate might still be higher if you own a car, rent an apartment, or buy certain services. The average doesn't always feel true. Luna: We should also note that the Fed's preferred measure, the PCE price index, was up 0.3 percent in May, and core PCE is still running above 2 percent. So the battle isn't over. Lucas: And the 10-year breakeven inflation rate, which is a market-based measure of expected inflation, ticked up to 2.26 percent yesterday. That's still above the Fed's target. So markets are pricing in some persistence. Luna: All of which means that car insurance — and services like it — are going to stay in focus for the Fed and for households. Lucas: Yeah. And if you're listening and your renewal just came in, you're not alone. The data backs up what you're feeling.