Episode Details

Our experts discuss how high prices for auto insurance have been driving inflation, and the implications for consumers and the Fed now that price increases are due to slow.

----- Transcript -----

Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist.

Diego Anzoategui: I'm Diego Anzoategui from the US Economics team.

Bob Huang: And I'm Bob Huang, the US Life and Property Casualty Insurance Analyst.

Seth Carpenter: And on this episode, we're going to talk about a topic that -- I would have guessed -- historically we weren't going to think about too often in a macro setting; but over the past couple of years it's been a critical part of the whole story on inflation, and probably affects most of our listeners.

It's auto insurance and why we think we're reaching a turning point.

It's Thursday, July 18th at 10am in New York.

All right, let's get started.

If you drive a car in the United States, you almost surely have been hit by a big increase in your auto insurance prices. Over the past couple of years, everyone has been talking about inflation, how much consumer prices have been going up. But one of the components that lots of people see that's really gone up dramatically recently has been auto insurance.

So that's why I wanted to come in and sit down with my colleagues, Diego and Bob, and talk through just what's going on here with auto insurance and how does it matter.

Diego, I'm going to start with you.

One thing that is remarkable is that the inflation that we're seeing now and that we've seen over the past several months is not related to the current state of the economy.

But we know in markets that everyone's looking at the Fed, and the Fed is looking at the CPI data that's coming out. We just got the June CPI data for the US recently. How does this phenomenon of auto insurance fit into that reading on the data?

Diego Anzoategui: Auto insurance is a relatively small component of CPI. It only represents just below 3 per cent of the CPI basket. But it has become a key driver because of the very high inflation rates has been showing. You know, the key aggregate the Fed watches carefully is core services ex-housing inflation. And the general perception is that inflation in these services is a lagged reflection of labor market tightness. But the main component driving this aggregate, at least in CPI, since 2022 has been auto insurance.

So the main story behind core services ex-housing inflation in CPI is just the lagged effect of a cost shock to insurance companies.

Seth Carpenter: Wait, let me stop you there. Did I understand you right? That if we're thinking about core services inflation, if you exclude housing; that is, I think, what a lot of people think is inflation that comes from a tight labor market, inflation that comes from an overheated economy. And you're saying that a lot of the movement in the past year or two is really coming from this auto insurance phenomenon.

Diego Anzoategui: Yes, that's exactly true. It is the main component explaining core services ex-housing inflation.

Seth: What's caused this big acceleration in auto insurance over the past few years? And just how big a deal is it for an economist like us?

Diego Anzoategui: Yeah, so believe it or not, today's auto insurance inflation is related to COVID and the supply chain issues we faced in 2021 and 2022. Key cost components such as used cars, parts and equipment, and repair cost increased significantly, creating cost pressures to insurance companies. But the reaction in terms of pricing was sluggish. Some companies reacted slowly; but perhaps more importantly, regulators in key states didn't approve price increases quickly