Inflation Is Still High. Used Car Prices Could Help Explain What Happens Next

Jul 13, 2021
Originally published on July 13, 2021 8:51 am

Surging prices for used cars have been a major driver of inflation this year. Now, there are signs those price hikes may be shifting into reverse — and that could provide important clues about where inflation is headed next.

The prices dealers pay for used cars at massive auctions across the country finally dipped in June after hitting record highs in each of the four previous months, according to the Manheim Used Vehicle Value Index.

Those drops in wholesale prices bode well for those in the market for a used Jeep. While retail prices for used cars still surged in June, the fall in wholesale prices suggest that what consumers pay will likely start to fall soon.

Such an easing in prices would be consistent with the Federal Reserve's argument that the recent surge in consumer prices is likely to fade as pandemic bottlenecks are resolved and demand returns to more normal levels.

It's a view that's shared by many economists, though not all, who fear accelerating inflation could prove harder to reverse.

The Labor Department reported Tuesday that consumer prices jumped 0.9% between May and June — the largest one-month increase since 2008. Surging prices for used cars and trucks accounted for more than a third of that inflationary spike.

On a year-to-year comparison, prices surged 5.4%, the highest in nearly 13 years.

For inflation to ease some factors the Fed believes to be transitory will need to ease, like used car prices.

Used cars have been in high demand this year, partly because of a shortage of new cars.

A severe global shortage of semiconductors hit automakers hard, forcing them to limit production despite surging demand.

That supply chain disruption has been magnified by the lingering impact of a deep freeze in Texas earlier this year that limited production of plastics used in cars, as well as by recent flooding in Michigan.

"It's just been a series of perfect storm events that have prevented the new vehicle production from getting back to normal," says Jonathan Smoke, who tracks car prices as chief economist for Cox Automotive. "And while that supply has been challenged, we've had surging demand" for cars as more people are driving for work and vacation.

The reduced selection of new cars has had a big spillover in the used market.

The retail price of used cars jumped 10.5% between May and June, following a 7% jump the month before.

In recent weeks, however, the buying frenzy has slowed. Inventory at used car lots has returned to more normal levels, and demand at wholesale auto auctions is less intense than it was earlier this year.

"It isn't that demand has completely cratered," Smoke says. "It is simply that we've gotten past what has been a crazy spring."

Wholesale prices for used cars have dropped more than 2% over the last four weeks. Smoke expects that by the end of the year, wholesale prices will have fallen 9% from their June peak.

Assuming retail prices follow a similar path, that would support the Fed's argument that higher inflation is being driven by temporary phenomenon like used car prices.

"This is the poster child illustration for transitory" price hikes, Smoke says.

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SACHA PFEIFFER, HOST:

The rising cost of used cars has been a major contributor to inflation this year, but there are signs those price hikes will soon be easing up. The amount dealers pay for used cars hit a peak last month, and it's falling. As NPR's Scott Horsley reports, it's one example of the Federal Reserve's argument that higher inflation is likely to be temporary.

SCOTT HORSLEY, BYLINE: The Manheim auto auctions are a massive clearinghouse, where nearly 6 million used cars change hands every year.

(CROSSTALK)

HORSLEY: If you buy a used car from a dealer, chances are good the dealer bought it at one of these auctions. Chief economist Jonathan Smoke, who's with the auction's parent company, Cox Automotive, says the prices paid here are a kind of stock ticker for the overall used car market.

JONATHAN SMOKE: The wholesale market is an incredibly efficient market, showing you any imbalances that might exist between demand and supply.

HORSLEY: Smoke says for much of this year, the market for both new and used cars was wildly out of balance. Carmakers just couldn't build cars fast enough. Besides the ongoing semiconductor shortage, there was the deep freeze in Texas which hurt plastic production and then severe flooding in Michigan.

SMOKE: It's just been a series of perfect-storm events that have prevented the new vehicle production from getting back to normal. And while that supply has been challenged, we've had surging demand.

HORSLEY: Since the pandemic, a lot of people would rather drive than ride the subway. They'd rather take a road trip than get on an airplane. And maybe they need a car to get around their new suburban neighborhood. That strong demand, coupled with limited supply, pushed the price of used cars to a record high in May, accounting for about a third of that month's overall inflation. But then the dam broke. The wholesale price of used cars peaked in June and has been coming down for the last four weeks. Smoke says buying at the auctions has been a little less frenzied over the last month, and there are now more vehicles to choose from on used car lots around the country.

SMOKE: Well, it isn't that demand has completely cratered; it is simply that we've gotten past what has been a crazy spring.

HORSLEY: And that's what the Federal Reserve is counting on when it argues the recent spike in inflation is likely to be transitory, a byproduct of surging demand colliding with pandemic bottlenecks. Over time, the central bank believes these market kinks will get worked out, and prices will ease. Smoke says evidence from the used car market seems to support that.

SMOKE: This is the poster child illustration for transitory.

HORSLEY: Of course, while used cars were a big factor in the May inflation number, they were only one factor. Other prices will be in the spotlight today when the June inflation figure is released. As travel recovers from its pandemic slump, for example, we could see higher prices for hotel rooms, airline tickets and rental cars - oh, and don't forget gasoline to power those cars. AAA says gas prices are now averaging nearly $3.15 a gallon, and they could climb another 20 cents this summer. Even so, auto club spokeswoman Jeanette McGee says travel over the Fourth of July weekend was the highest it's been in more than 20 years.

JEANETTE MCGEE: We do not expect these higher gas prices to keep people off the road. They are definitely going to venture out and enjoy their beach time and their time with family and friends. It's just going to be one of those summers where Americans are going to pay a little bit more and enjoy the time away.

HORSLEY: As demand grows for travel, entertainment and in-person services, demand for a lot of goods could start to taper off, putting downward pressure on those prices. Smoke says the wholesale price of used cars has already dropped by 2% from its peak and could fall by 9% in the coming months, helping to put the brakes on inflation during the second half of this year.

Scott Horsley, NPR News, Washington.

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