A surprising category is helping derail the U.S. economy's disinflationary path: car insurance, where the cost of coverage is rising at unprecedented rates.

Why it matters: Pricier auto insurance is a key example of the persistent difficulty in slowing down overall inflation.

• Four years on, lagged effects from the pandemic are still warping price-setting behavior for car insurers. Meanwhile, labor shortages lingering in some sectors have pushed wages up, which are flowing on to coverage costs.

By the numbers: Hotter auto insurance prices make up a notable part of the Consumer Price Index's gain over the past year.

• As of March, the category contributed roughly 0.6 percentage points to the annual increase. If you strip out oil and food prices, that sector has contributed 0.8 percentage points to core CPI's annual gain.

Among the key reasons that insurance costs are jumping: Cars are more expensive, and they're also getting more expensive to fix after accidents. Pricier repairs are explained, at least in part, by a shortage of mechanics and repair shops having to pay up to employ them.

• Insurers also see a necessary adjustment after underpricing coverage in recent years, especially when the economy was locked down and there were fewer collisions.
• When the economy opened back up, drivers hit the road again and higher instances of crashes returned — with insurers having to pay out more than they were taking in from customers.
• It's a long, state-by-state slog for insurers to get rate hikes approved — meaning premium hikes proposed long ago are only recently hitting consumers.

What they're saying: "The system at this point just has a lot of inflationary forces," Allstate EVP and CFO Jess Merten said at a conference last month.

The intrigue: Last week's CPI report showed that the auto insurance sub-index jumped 2.6% in March alone. However, that huge gain is not expected to be reflected in the Personal Consumption Expenditures index, the inflation gauge tracked by the Fed.

• That's because the measures account for the auto insurance industry differently. Price increases look more benign in PCE, which is one factor causing it to diverge from CPI.
• Whereas PCE measures the net cost of auto insurance — premiums paid subtracted from claims paid out — CPI only measures premiums, capturing more broadly what consumers pay for insurance.

The bottom line: "Once insurance underwriters have reset premiums to appropriate levels, auto insurance inflation should subside," Lazard CFA Ron Temple wrote in a note on Friday.

• "But after a year of such outsized increases, it's difficult to forecast when this might occur," Temple added.

For the latest sign of U.S. economic resiliency, look no further than today's retail sales report.

Driving the news: Retail sales rose 0.7% in March, while the previous months' figures were even better than originally thought, the government said.

• In February, for instance, retail sales rose 0.9% — 0.3 percentage points more than first estimated.

Why it matters: The consumer appeared to be pulling back at the start of 2024, raising concerns about the health of household balance sheets.

• But that weakness now looks like a head fake. Today's data is strong evidence that the consumer is still hanging on, a huge vote of confidence for the health of the overall economy.

What they're saying: "The ebullient gains in employment and sturdy wage growth provides consumers the income wherewithal to keep spending at a rapid pace," Kathy Bostjancic, chief economist at Nationwide, wrote in a note.

Zoom in: The data, which is not adjusted for inflation, showed stronger sales at online retailers, gasoline stations, building suppliers, and food and beverage shops. That offset a drop in sales at electronics stores, auto shops and clothing retailers.

• The so-called control group — which excludes volatile categories like gas, autos, and building materials and feeds into the calculation of consumer spending in GDP — rose 1.1% in March.
• That follows a 0.3% increase in February and a slightly negative reading (-0.1%) in January.

The bottom line: "We do not think the robustness of the March data can be explained away," economists at Bank of America wrote this morning.