The wholesale price of used cars is falling off a cliff while the prices that car shoppers are paying is way up, suggesting dealers are making a killing while consumers are taking a bath.
Wholesale used car prices declined 2 percent from September in the first half of October and are down 10.3 percent from a year ago, according to The Manheim Used Vehicle Index published on Monday.
Wholesale used luxury car prices are down 13.5 percent while used sport utility vehicles are down 12.3 percent and pickup trucks are down 8.4 percent.
Meanwhile, the retail price that car shoppers are paying for used cars has increased 7.2 percent since last year, according to the Department of Labor’s latest consumer price index.
Economists say the fact that dealers are paying less for cars than they were a year ago while shoppers are paying more suggests that dealers are holding onto the difference.
“Dealers don’t have to pass it on. They can make bigger profits,” former Federal Reserve banker Claudia Sahm said in a message to The Hill.
Economist Dean Baker of the Center for Economic Policy and Research said the difference “likely is in part margins, but also a lag.”
“If a dealer paid $5,000 for a car that today would sell for $4,500 in the wholesale market, they probably will still look to get a price that compensates them for the $5,000 they paid. That might mean there is a month or two for prices in the retail market to adjust to prices in the wholesale market,” he told The Hill.
The marked contrast in the directions of pricing trends in the used car market comes as the Federal Reserve is hiking interest rates in order to bring down inflation. Federal Reserve officials say that by increasing interest rates, they will bring down demand and that lower demand will bring down prices.
“In the United States, we … have a demand issue,” Federal Reserve Chair Jerome Powell said during a press conference last week at which he announced another three-quarter-percent rate hike. “We’ve got an imbalance between demand and supply, which you see in many parts of the economy. So, our tools are well suited to work on that problem.”
But some economists are asking the Fed for further details about how they expect these dynamics to work.
“Powell’s public remarks offer little insight into how he expects higher rates to tame inflation,” UBS economist Paul Donovan wrote in the Financial Times last week. That’s important because “today’s price inflation is more a product of profits than wages.”
“Companies have passed higher costs on to customers. But they have also taken advantage of circumstances to expand profit margins. The broadening of inflation beyond commodity prices is more profit market expansion than wage cost pressures,” Donovan wrote.
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November 07, 2022 at 11:18PM
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Wholesale used car prices plummet as retail prices soar - The Hill
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