High used car prices point to severe inflation
Wholesale prices for used cars and trucks jumped 8.3% in the first 15 days of October compared to September, according to the Mannheim Used Car Value Index.
“There was a two to three month delay between the two, so as we head into 2022 there is likely to be a significant upward impact on the CPI number,” said Jim Reed, strategist at Deutsche Bank.
Used car prices are up 37% in the past 12 months as a global shortage of chips has held automakers back from production, driving up demand for used cars.
Prices were also seen rising due to pent-up demand caused by the pandemic with many consumers having more money to spend due to government stimulus measures.
Used car prices make up about 4% of the core CPI basket, but added about a 1 percentage point increase, according to Reed.
Core CPI, which excludes food and energy, rose 4% year over year in October. However, it included a 24.4% year-on-year increase in used car prices – less than the Mannheim Index’s rise in the value of used cars by more than 12 percentage points.
Federal Reserve Chairman Jerome Powell said the recent wave of inflation is “transient” and that price increases will subside as supply chain bottlenecks ease.
The Fed, at its next meeting in November, is expected to lay out its plans to reduce $120 billion per month in asset purchases. However, price increases are unlikely to start for several months.
While the Fed expects inflation to be moderate, Reid says there are indications that pricing pressures may get stronger in the coming year.
“Basic rents and owner’s equivalent rents make up about a third of the basket (40% for basic), and although they won’t grow at the same breakneck speed. [as vehicle prices], forward-looking models suggest it could be a big story in 2022 and the baton could be passed from cars to housing for CPI strength.”