‘A Little Crazy’: How the Booming US Used Car Market Stimulates Inflation
Last month, it took Carey Cherner, a 36-year-old used car dealer in Kensington, MD, less than 12 hours to sell a 2001 Ford F-150 pickup truck with 184,000 miles on the clock. It cost $ 7,500, which is 50% more than usual.
Cherner’s experience was not unique to the US used car market, where prices are rising rapidly. The industry is at the heart of the country’s growing inflationary pressures – and has therefore become a topic of great interest to policymakers in Washington.
“There are more people buying cars than there are cars on the market, which makes things a bit crazy,” Cherner said.
Exceptionally, officials are closely monitoring used car prices as an indicator of future inflation developments. If the price hike takes hold and spreads to other sectors of the economy, America could face a prolonged period of overheating for the first time in decades, pose a big challenge for the US Federal Reserve and Joe Biden’s economic policymakers.
The cost of used cars and trucks jumped 10% month over month in April and 21% year over year, making it one of the main drivers of the 4.2 percent year-over-year rise in the US Bureau of Labor Statistics Consumer Price Index. Core inflation – excluding volatile food and energy prices – reached 3%.
Ernie Garcia, founder of the online used car platform Carvana, said: “Prices are unmistakably higher than they have ever been and have unquestionably moved faster than I think.
Inflation: a new era?
Prices are rising in many large economies. The FT examines whether inflation is back for good.
DAY 1: Advanced economies haven’t faced a rapid rise in inflation for decades. Is this going to change?
DAY 2: The global consensus among central bankers on how best to foster low and stable inflation is broken down.
DAY 3: The canary in the coal mine for inflation US: used cars.
DAY 4: How a virus can disrupt official inflation statistics.
DAY 5: Why rising prices in advanced economies are a problem for indebted developing countries.
Policymakers insist that the pressures will gradually ease, reinforcing their view that the broader inflationary trend will be primarily transitory. In a speech on Tuesday, Lael Brainard, a Fed governor, said that while used vehicle cost pressures “may persist through the summer months, I expect them to continue. subside and probably reverse somewhat in the following quarters ”.
But while many economists agree that inflationary pressures are likely to be temporary, they also recognize that the uncertainty over the economic outlook is enormous; As the pandemic recedes across America, consumers are bursting with savings and government payments as supply chains are strained by bottlenecks.
“We are seeing a level of stimulus that is essentially unprecedented over the past 50 years, along with other forms of spending support. These are truly uncharted waters and we must be humble, ”said Nathan Sheets, chief economist at PGIM Fixed Income and former US Under Secretary of the Treasury. “How sure am I that I am correct that inflation is going to dissipate?” Probably 80%, but it’s still a pretty big cock.
The surge in prices is due to the slowdown in the production of new cars due to lockdowns and semiconductor shortages.
Additionally, which is unusual for a recession, the number of customers who defaulted on vehicle financing and had their car repossessed has declined, cutting off another source of supply for dealerships such as Cherner.
Demand has exploded. Americans’ preferences have shifted away from public transportation due to the pandemic. Stimulus measures have helped them spend. And the car rental companies that sold their fleets as travel collapsed last year are now scrambling to rebuild them with used vehicles.
“It’s incredibly tight right now: you have more demand. . . which is backed by fiscal stimulus, so it’s like a perfect storm. And we see it clearly in the prices, ”said Laura Rosner, senior economist at MacroPolicy Perspectives.
But Jonathan Smoke of Cox Automotive, a consulting firm for auto dealers, noted that “several leading indicators of what is happening at our auctions” suggest that “the streak of price appreciation is likely to end.” .
This leaves US economists and officials wondering how long it will take for price growth to return to levels closer to the Fed’s average 2% target, allowing some overshoot.
Goldman Sachs predicts that core inflation will peak at 3.6% year-on-year in June, declining slightly to 3.5% by the end of the year and hovering around 2.7% in 2022.
Fed officials are monitoring not only headline and core inflation, but other measures of price growth as well.
The core personal consumption expenditure index – traditionally the Fed’s preferred indicator – rose 3.1% in April, although the Dallas Fed’s cropped average PCE indicator rose a more modestly. 1.8%.
The US central bank has also developed a quarterly index of common inflation expectations to assess whether they are deviating from its targets; its next reading is scheduled for July. Despite these efforts, uncertainty has rocked some economists and investors.
“Overall, our baseline inflation scenario has not changed, but our conviction in this regard must be weaker,” said Lynda Schweitzer, co-head of the global bond team at Loomis Sayles. “We have to consider the risks of something more sustained.”
And in Maryland, Cherner is optimistic about the outlook.
“I don’t see a steep fall [in prices] until there is much more supply than demand, ”he said. “They still have to build the new cars, put the chips in and take them out. I just think it’s gonna last.