Posted on 06/07/2021 1:53:36 AM PDT by blam
Used car prices in the US continue to surge due to both the country’s economic recovery and an ongoing supply crunch.
There are two components to watch in the core inflation report due next week. First is, and most importantly, are used car prices and second is the rent of shelter.
Core inflation in April saw a more significant contribution to used car prices pushing inflation upwards of 2% YoY mainly because prices of used vehicles on the month jumped 21% YoY.
For those who haven’t seen what is going on in the used car space, here is a chart of the Mannheim used car index:
“Prices on used vehicles increased by an astonishing 21 % YoY in April (contributing 0.8% to the yearly change in core inflation). According to Manheim Consulting, prices on used cars and trucks are expected to climb further to 50 pct YoY in May or June (3 months lag). If we assume a 50% yearly increase in used cars in May (Manheim may exaggerate the yearly price increase a bit), then core inflation will potentially surpass 4%. Supply chain disruptions, shortage of semiconductors and Covid-19 restrictions have all played a part in disturbing the price action in the car market, but bottlenecks are not always the root cause of inflation – they can also be seen as a symptom,” said Nordea.
This means that the May inflation report next week (due June 10) could be an absolute shocker.
“We see clear risks of a big positive surprise to the May inflation report as well with core inflation around or just above 4%. The market is still buying the transitory inflation narrative but for how long? Lately, increasing (US) inflation has been the main concern of markets,” Nordea said, adding that, “We are likely in for another inflation shocker in June, but the question is whether the market will explain it away as a transitory effect.”
Peering into the real world, Financial Times speaks with people within the industry and in financial markets about what’s fueling used car prices.
Carey Cherner, a 36-year-old used car dealer in Maryland, sold a 2001 Ford F-150 pick-up truck with close to 200k miles for $7,500, more than 50% higher than pre-pandemic prices.
“There are more people buying cars than there are cars in the market, which makes it go kind of crazy,” Cherner said.
Policymakers, such as Federal Reserve members, continue to soothe the market with the word “transitory” almost daily, as a form of a communication tool to admit there are inflationary pressures but avoid market participants from panicking.
Lael Brainard, a Fed governor, said earlier this week that used car cost pressures “may persist over the summer months, I expect them to fade and likely reverse somewhat in subsequent quarters”.
But the problem here is that policymakers have been telling us that these pressures are “transitory” for months and keep pushing out the goalposts of when they want everyone to believe inflation diminishes.
Nathan Sheets, the chief economist at PGIM Fixed Income and a former under-secretary at the US Treasury, said there is an “unprecedented level of stimulus plus other forms to support spending” floating around the economy. A combination of helicopter drops by the federal government and supply chain disruptions resulted in the quickest “V-shaped” recovery that ultimately sparked supply constraints, driving up prices.
“How sure am I that I am right that inflation is going to dissipate? Probably 80 percent, but that is still a pretty fat tail,” Sheets said.
“It’s incredibly tight right now: you have more demand . . . that is supported by fiscal stimulus, so it’s just like a perfect storm. And we see that clearly in prices,” said Laura Rosner, a senior economist at MacroPolicy Perspectives.
But Jonathan Smoke of Cox Automotive, a consultancy for automobile dealers, noted that “several leading indicators of what’s happening at our auctions” suggest “the price appreciation streak is likely going to end.”
However, in Maryland, Cherner doesn’t believe there will be a “steep drop-off [in prices] until there’s way more supply than there is demand. They [automakers] still have to build the new cars and get the chips in them and get them out. I just think it’s going to last.”
So the main driver in next week’s inflation report will most likely be surging used car prices, and the red hot numbers may cause the Fed to start tapering
(snip)
The auto industry is already stuck between a rock and a hard place, as dealers struggle to get production up to speed despite an ongoing semiconductor chip shortage that has hamstrung production for some of the world’s biggest manufacturers.
At the same time, the U.S. is letting the inflation genie quietly begin to slip out of the bottle. As rising prices take hold amidst supply chain imbalances, focus has turned to automobiles. With new car inventory crunched due to production constraints, used car prices have skyrocketed, as we have noted recently.
Go to Hotwire and try to rent a car: $189/day in Spokane Washington - insane ...
Yup. I read that the car rental companies are buying all the used cars at auto auctions just to have cars to rent.(No new cars available)
Also, I heard 'travelers advice' is to rent the car before you buy plane tickets. There may not be a car available.
we have ownership of my mils little suburu...about 75000 miles on it, early 2000’s I believe....we don’t need it but its value is just going up and up....
Very strange going ons here. I passed a Car Max location on the 15 fwy heading to San Diego last week.The lot was packed with available cars. IDK, maybe the wrong kind of cars, Sedans? Rental company’s had to liquidated hundreds of thousands of cars last year, where did they go?
“Also, I heard ‘travelers advice’ is to rent the car before you buy plane tickets. There may not be a car available”
That can’t help the recovery if folks wanting to travel can’t rent a car or even if they can it blows their budget up to the point they say screw it and stay home.
Thinking of selling my jeep Sahara
A “Shocking” Inflation Report Next Week would be so unexpected.
Aw, shucks. Another monthly report. Another piece of “unexpected” bad news. And Biden has three and a half years to go.
If it’s paid for, and of relatively low mileage, kind of like keeping a stash of gold under your mattress. Good insurance for later on, when things get REALLY bad.
Fuel is going to be the limiting factor.
I’ve been planning a trip for September and it’s way cheaper to make short flights than to rent and drive.
We have a 2006 Honda CRV with 96,000 miles. Looks perfect and runs like top. I’m going to keep it for a few more years.
Nothing is really shocking. Between handing free money left and right and slapping politicized sanctions on foreign trade, the USD is becoming a toxic asset everybody is seeking to dump for Euro and Chinese money.
A shock would be $300 for a pack of beers in a couple years.
Even doing that, you may not have a car when you land.
Had a coworker get to their destination and find out that the car they paid to rent didn’t exist.
I found this all out the hard way in March when my Toyota was totalled.
First weird thing was that it took me two days to get a rental car. They blamed it on “spring break” which sounds plausible.
Then it took me several weeks to find a decent used car. Dealers had almost none - which they blamed on the stimulus checks and tax refunds....maybe. Private dealers wanted way too much for their cars, I thought, and most were in terrible condition.
I finally found one - and ever since then have been reading these used car shortage stories. Just glad I was looking two months ago and not NOW when it’s so much worse!
Dealerships all over town are out of used cars, and their new car lots are very very thin (the chip issue).
I’m making some slow go progress on both the Willys and CJ7.
The Willys tub I’ll need a torch for to get some of the body bolts off. Dad dropped by yesterday. He offered to haul it upstate. Hit it with a torch and steam all the sludge off as well. It’d save me buying a torch I might use once for about 10 minutes and a ton of grief with assorted power tools hand cleaning.
Hope to around July 4.
I also got some help roughing in the windshield frame. An extra pair of hands were needed just to run some bolts so I didn’t break anything. It’s nice to see it take more of a form.
An aunt by marriage has one, slightly modified. She says she can sell it every day. Someone always wants to buy the jeep from her. I like my vintage AMC / Willys stuff.
The vintage is great, but not for a non mechanical sort...
No, I owe about 18 mileage is low, I hardly ever drive it.
My problems with Wranglers and later generations are the electronics and some of the aesthetics.
I like steel and if I have to run my own wires to make something work, make it so.
The only electronics my Willys has is an aftermarket distributor which made an unreal difference.
As the Willys comes back together the plan is to have it a powdercoated, electrically simple as possible, and stripped to the bare bones street legal 4WD go-kart.
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