“Kind of crazy”: How the U.S. used car market is causing rising inflation

Last month Carey Cherner, a 36-year-old car salesman in Kensington, Maryland, needed less than 12 hours to sell a 2001 Ford F-150 truck that was 184,000 miles on the clock. It was made for $ 7,500, 50 percent more than usual.

Cherner’s experience was not sudden in the U.S. used car market, as prices are rising rapidly. Industry is at the root of the growing inflationary pressures in the country, and has therefore become a topic of great interest to Washington policymakers.

“There are more people in the market buying cars than that, which makes it crazy,” Cherner said.

As usual, officials see the prices of used cars up close as an indicator of the path to future inflation. If price hikes take root and spread to other parts of the economy, America could experience a long period of warming for the first time in decades, poses a great challenge For the US Federal Reserve and Joe Biden’s economic politicians.

The cost of used cars and trucks rose by 10% month-on-month in April, up 21% from a year earlier. 4.2 percent Year-on-year increase in the U.S. Consumer Price Index of the Labor Statistics. Basic inflation, excluding volatile food and energy prices, reached 3 percent.

Ernie Garcia, founder of the platform for the sale of used cars online at Carvana, said: “Prices are higher than ever and they have arguably moved faster than they thought.”

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DAY 1: Advanced economies have not coped with rapid inflation growth for decades. Is that about to change?

DAY 2: How to better promote low and stable inflation among central banks has broken down.

DAY 3: Canary from the coal mine for US inflation: used cars.

DAY 4: How a virus can disrupt official inflation statistics.

DAY 5: Why they are raising prices in advanced economies for developing countries that are borrowing.

Politicians stress that the pressures will gradually decrease, believing that the broader inflation trend will be mainly transient. In a speech Tuesday, Lael Brainard, the governor of the Fed, said the pressure on used vehicle costs “although it may last into the summer months, it will disappear in the coming quarters and I expect it to be somewhat reversed.”

But while many economists agree that inflationary pressures will be temporary, they also acknowledge the high uncertainty over the economic outlook; As the pandemic recedes in America, consumers are left with savings and government payments as supply chains tighten.

“We’ve been seeing an unprecedented level of stimulus over the last 50 years, as well as other types of spending support. It’s really unknown water and we need to be modest,” said Nathan Sheets, PGIM’s chief fixed income economist and former U.S. Treasury Secretary . “What am I sure I am right that inflation will be wasted? Probably 80 percent, but that’s still pretty gross tail. “

The rise in prices has led to a slowdown in the production of new cars due to blockages and a shortage of semiconductors.

Moreover, for an unusually recession, the number of customers who have defaulted on vehicle financing and recovered the car has dropped, cutting off another source of supply for dealers like Cherner.

Demand, on the other hand, has risen. Americans ’preferences have shifted from public transportation because of the pandemic. Stimulus measures have helped them spend. The rental car companies that sold the fleets when they crashed last year are struggling to rebuild with used vehicles now.

“It’s extremely tight right now: you have more demand. . . it supports fiscal stimuli, so it’s like a perfect storm. And we’re seeing that clearly in pricing, ”said Laura Rosner, chief economist at MacroPolicy Perspectives.

But Jonathan Smoke of Cox Automotive, a car dealership consultancy, said “the most important indicators of what’s happening at our auctions” suggest that “it’s likely to end the price estimate line.”

This allows economists and U.S. officials to consider how long it will take for price increases to return to levels closer to the Fed’s 2 percent target, which may exceed that.

Goldman Sachs expects core inflation to be 3.6 percent in June year-on-year, down from 3.5 percent by the end of the year and averaging 2.7 percent in 2022.

Faith officials see not only major inflation and core inflation, but also other measures of price growth.

The personal consumption expenditure index – traditionally the Fed’s preferred indicator – rose 3.1% in April, despite the Dallas Fed’s reduced PCE average indicator rising 1.8 percent lower.

The U.S. central bank has developed a quarterly index of current inflation expectations to assess whether they deviate from its targets; the next reading will be in July. Despite efforts, uncertainty has affected some economists and investors.

“Overall our underlying case of inflation has not changed, but our opinion should be lower than that,” said Lynda Schweitzer, head of the world fixed income group at Loomis Sayles. “We need to consider the risks of something more sustainable.”

And in Maryland, Cherner is hopeful.

“I don’t see a big drop [in prices] until there is more supply than demand, “he said.” They still have to build new cars and get the chips in and out. I think it will last. ”