Falling car-insurance prices have been helping to cool off inflation data. Looking under the hood at insurers suggests they can keep going in that direction for a while.

Insurance is historically a cyclical business, featuring "hard" markets of rising premium rates leading to higher profitability, followed by "soft" markets of lower rates eating into those profits, and so on. Right now, it is a softening market in auto insurance. Car insurers are broadly dropping many rates to help them grow, following surges of premiums in the aftermath of the pandemic.

The July consumer-price index showed motor-vehicle insurance falling 4.5% year-over-year, the fastest drop since 2020, when the pandemic led to a plunge in driving activity. It was the third month in a row of year-over-year declines, and a stark reversal from the double-digit rises seen from 2022 to 2025.

But the question for the Federal Reserve and other inflation watchers is how long this new soft market cycle will last. Because within the CPI report was at least one reason to expect rate drops to be short-lived: rising auto-repair costs.

It was inflation in those costs that helped cause underwriters' profits to drop after the pandemic, forcing them to ask regulators for big rate increases. Motor-vehicle maintenance and repair costs in the July consumer-price index were up 6.6% from a year ago, only a small slowdown from June's sharp 7% jump.

That rise isn't a fluke. While some industries are anticipating tariff refunds following the Supreme Court's decision, others-such as auto parts-can remain subject to President Trump's levies under different legal authorities. "Section 232 tariffs are weighing on the auto sector with higher motor vehicle parts and equipment prices spilling over into motor vehicle maintenance and repair, so this isn't likely a one-off," wrote economists at RBC.

However, there is still quite a bit of cushion for insurers to continue to lower some rates before their margins become too narrow for comfort.

For insurers such as Allstate, Hartford, Progressive and Travelers, combined ratios in personal auto insurance-which measure loss costs and claims expenses as a percentage of premiums-are still in the low to high 80% range as of the second quarter. That is well below the 100% level that means insurers are paying out more than they take in, and still below the low to mid 90% range where for-profit insurers often tend to aim over time.

"There is a lot of margin to consume before companies get worried," says KBW analyst Meyer Shields. "We're not seeing repair inflation fast enough to deter companies from still aiming to grow faster."

For now, property and casualty insurers' underwriting profitability-across auto and other lines-is expected to stay stable through next year. Economists at the Swiss Re Institute in July projected that overall P&C combined ratios in the U.S. would be 95% this year, up from about 94% last year.

Swiss Re Institute economists project that ratio will move to just over 100% in 2027. But the industry has run above that level for years at times in the past. Higher-for-longer interest rates could help offset lower underwriting income by boosting investment income too.

The cost of car repairs isn't the only input into loss trends. Importantly, the frequency of claims has been trending downward recently. That means policyholders are making claims less often.

There are potentially several causes of lower frequency. Some analysts point to high gas prices causing people to drive less often. It can also be due to people choosing not to seek coverage because they have high deductibles and would rather pay cash than make a claim. Maybe they also just don't expect to get coverage at all on certain claims.

Investors still aren't thrilled with the soft market, pricing stocks as if the margin compression will continue. The forward price-to-earnings ratios of three insurers with personal-auto businesses-Allstate, Progressive and Travelers Cos.-are on average around 11 right now. That ratio has averaged over 13 during the past decade.

Neuberger global insurance analyst Chai Gohil estimates that, barring another unexpected surge in energy or import costs, auto rates might continue to compress for an additional 18 months or so, based on the recent pace of loss inflation and of insurers' regulatory filings for rate changes.

If history is any guide, eventually insurance rates will start to rise again, putting inflationary pressure on consumer prices overall. One early sign of that might be when auto insurer valuations zoom higher.