Why Used Car Prices Are Pushing Inflation Up

A pedestrian walks past a certified used car dealership in Alhambra, California on January 12, 2022.

Frederick J. Brown | AFP | Getty Images

Despite President Joe Biden’s upbeat comments about what appears to be an early sign of a peak in inflation, used car prices continue to rise at levels never seen before the Covid-19 pandemic this century.

The Biden administration blamed much of the country’s rising inflation on the used car market. The problem the White House acknowledges is that there is little it can do to help cut rates right now.

Over the past 20 years, the contribution of used cars to inflation has averaged zero. According to the US Bureau of Labor Statistics, it is currently over 1% on an annualized basis.

In December, the prices consumers paid for goods and services rose 0.5%, while prices for used cars rose 3.5%. Based on a weighted calculation of this price change and Americans’ demand for used cars, the Department of Labor estimates that used car prices contributed 0.112 percentage points to the overall 0.5% increase.

Used car prices also have a historically strong impact on overall headline inflation. This was stated by economic adviser to the White House, Jared Bernstein. Bernstein, a member of Biden’s Council of Economic Advisers, wrote that he considered the impact of used cars on headline inflation “remarkable and revealing.”

“This is a reminder of how unusual the current inflation is,” he continued. “The world hasn’t forgotten how to produce new (and therefore used) cars, and we should expect this series to return once major supply constraints ease.”

Reflecting the view of most economists, Bernstein wrote that the main supply chain disruption responsible for both used car inflation and its impact on consumer price index data is a shortage of semiconductors used in new car manufacturing.

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Economists say the backlog is due to the Covid-19 pandemic, which has closed factories around the world over the past two years and disrupted shipping routes. According to industry analyst firm Cox Automotive, these logistical hurdles are considered the prime suspect in a 25% surge in used car prices in 2021.

But the pandemic has changed consumer demand for cars and forced hundreds of thousands of people to cancel or postpone travel plans in 2020. This one-time mass cancellation has led to unprecedented demand for cars in the spring of 2021 as vaccines and relaxed public health regulations have allowed the public to plan vacations and other travel at the same time.

“There is still a lot of demand that just isn’t met yet. This is unmet demand,” Charlie Chesbrough, senior economist and senior director of industry research at Cox Automotive, told CNBC. “Until the new market can rebuild in such a way that demand is met and there is enough food for everyone, very strong sales will continue in the US markets.”

Simply put: without new cars, you can’t have used cars.

Cox Automotive reports that the average retail price for a used car in December hit a new record of more than $28,000.

“I think there is very little reason to expect any price reduction in the used car market anytime soon,” Chesbrough said.

The president’s approval ratings have taken a hit in recent months, with many voters polled telling CNBC and Change Research that they are concerned about the way the Biden administration is handling the economy. Sixty percent of the 1,895 poll respondents said they disapproved of Biden’s handling of the economy, down six percentage points from September.

But the White House is doing its best to emphasize to Americans that it is doing everything it can to offset rising prices.

As Bernstein noted on Twitter, the White House is taking some measures that could help ease price pressure on cars in the long run. The pending U.S. Innovation and Competition Act, which the Senate passed in June, will pump billions into domestic chip production as Washington seeks to curb China’s dominance in the industry.

The potential upside for the Biden administration is that inflation is expected to fall organically, with the Federal Reserve looking to raise interest rates this year.

Used car prices typically rise in the spring, so Cox Automotive expects prices to continue rising. But in the second half of the year, the company expects inflation to stop and a more normal depreciation pattern to resume.

Bank of America economist Alex Lin told CNBC last month that used car prices and general inflation will face tough year-over-year comparisons starting in the spring. It is assumed that if sellers raise the prices of used cars in early 2021, they will have to raise them by the same percentage this year if inflation remains at the same level.

And this, according to Lin, is unlikely.

“Wholesale prices have risen more than 60% since the pandemic,” Lin said in December. “So the question is, will we see another 60% next year?”

“I mean, I hope not,” he added. “But I think I would be skeptical about it as a baseline.”

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