FIGURES RELEASED on July 13th by the Bureau of Labour Statistics (BLS) showed that annual consumer-price inflation in America had reached a higher-than-expected 5.4% in June, and that prices had climbed by 0.9% in that month alone. This confirmed a trend. In April inflation hit 4.2% year on year, the highest rate since 2008; it rose again, to 5%, in May. But whereas in April, markets were spooked, as investors worried that higher inflation and interest rates could destroy asset values, the response to the latest data was far more muted: the S&P 500 barely budged. One reason could be that much of the inflation comes from a surprisingly small part of the economy: the market for used cars.
About one-third of June’s overall month-on-month rise stemmed from the appreciating value of second-hand cars. According to the BLS, the prices of used cars and trucks rose by 45% over the past year, the largest 12-month increase ever reported. The latest index of second-hand values published by Manheim, America’s largest used-car auction business, suggests that prices of pick-up trucks have risen by an astonishing 50% in one year. Ageing usually quickly destroys a vehicle’s value; not now.
Why are the prices of used vehicles soaring? The underlying cause is surging demand. Depressed sales during the first covid-19 lockdowns last year, when many would-be buyers feared for their jobs and many dealers were closed, are part of the story. Now pent-up demand is being unleashed. Drivers have savings to spend, in part because of stimulus cheques from the government. Low interest rates mean that car loans are cheaper than ever.
The specific dynamics of the car-rental business have turbocharged price rises. When the pandemic began, travel stopped and almost no one wanted to hire a vehicle. With bills to pay, most car-hire firms were forced to sell their vehicles at fire-sale auctions. Now, with restrictions being eased, demand for hire cars has bounced back faster than expected. More commuters and holidaymakers may want to travel by car for fear of infection on planes and public transport. Carmakers have been unable to expand production fast enough to replenish rental fleets, owing to a worldwide shortage of semiconductors. Ford, America’s second-largest carmaker, recently said it expected to produce 1.1m fewer vehicles than planned this year—a fifth of its usual production—owing to the chip shortage. So the hire firms have been splashing their cash at used-car auctions, driving prices up as they compete for the limited vehicles available.
Used-car prices will not accelerate forever. Indeed, the Manheim index of wholesale prices dropped slightly between June and July (the final kink in the chart above). That may be a sign of things to come. The supply of new cars will recover once the chip shortage has abated, easing demand for older ones. For now, though, the brakes are off.
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July 14, 2021 at 07:00AM
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The used-car market sent American inflation soaring in June - The Economist
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