Last month, it took Carey Cherner, a 36-year-old used car dealer in Kensington, Maryland, less than 12 hours to sell a 2001 Ford F-150 pickup with 184,000 miles on it. It went for $7,500 – 50 percent higher than normal.
Cherner’s experience was not a one-off in the US used car market, where prices are rising rapidly. Industry is at the heart of growing inflationary pressures in the country — and has therefore become a topic of great interest to policymakers in Washington.
“There are more people buying cars than there are cars on the market, which makes it a little crazy,” Cherner said.
It is unusual for officials to closely monitor used car prices as an indicator of the future inflation path. If price increases become entrenched and spread to other parts of the economy, America could face a prolonged period of overheating for the first time in decades, posing a major challenge to the US Federal Reserve and Joe Biden’s economic policymakers. .
The cost of used cars and trucks rose 10 percent month-on-month in April and increased 21 percent year-on-year, making it one of the main drivers of the 4.2 percent year-over-year increase. the US Bureau of Labor Statistics consumer price index. Core inflation – excluding volatile food and energy prices – reached 3 percent.
Ernie Garcia, founder of the online used car sales platform Carvana, said: “The prices are undoubtedly higher than ever and undoubtedly have risen faster than I think they have ever been.”
Inflation: a new era?
Prices are rising in many major economies. The The Washington City Times is investigating whether inflation is back for good.
DAY 1: Advanced economies haven’t had to deal with soaring inflation in decades. Is that going to change?
DAY 2: The global consensus among central bankers on the best way to promote low and stable inflation has broken down.
DAY 3: The canary in the coal mine for US inflation: used cars.
DAY 4: How a virus can disrupt official inflation statistics.
DAY 5: Why rising prices in advanced economies are a problem for indebted developing countries.
Policymakers insist that pressures will gradually ease, reinforcing their view that the broader inflation trend will be mostly transient. In a speech on Tuesday, Lael Brainard, a Fed governor, said that while pressures on used car costs may “continue into the summer months, I expect them to ease in subsequent quarters and likely reverse somewhat.”
But while many economists agree that inflationary pressures are likely to be temporary, they also recognize that uncertainty about the economic outlook is huge; As the pandemic subsides across America, consumers are getting savings and payments from the government, while supply chains are under pressure from bottlenecks.
“We are seeing a level of stimulus that is essentially unprecedented in the last 50 years, plus other forms of support for spending. These are truly uncharted waters and we need to be humble,” said Nathan Sheets, chief economist at PGIM Fixed Income and former undersecretary at the US Treasury Department. “How sure am I that I’m right that inflation will go away? Probably 80 percent, but that’s still a pretty big tail.”
The price increase is caused by the slowdown in new car production due to lockdowns and shortages of semiconductors.
In addition – unusual for a recession – the number of customers who have defaulted on car financing and have had their cars repossessed has declined, cutting off another source of supply for dealers like Cherner.
In the meantime, the demand has increased enormously. Americans’ preferences have shifted away from public transportation due to the pandemic. Incentives have helped them to spend. And rental car companies that sold off their fleets when travel collapsed last year are now trying to rebuild them with used vehicles.
“It is now very tight: you have more demand . . . that’s backed by fiscal stimulus, so it’s like a perfect storm. And we see that clearly in the prices,” said Laura Rosner, senior economist at MacroPolicy Perspectives.
But Jonathan Smoke of Cox Automotive, a dealership consulting firm, noted that “several leading indicators of what’s happening in our auctions” indicate that “the price hike is likely to end.”
That leaves economists and US officials thinking about how long it will take for price growth to return to levels closer to the Fed’s 2 percent average, allowing for some overshoot.
Goldman Sachs forecasts core inflation to peak at 3.6 percent year-on-year in June, decline slightly to 3.5 percent by the end of the year and average 2.7 percent by 2022.
Fed officials look not only at headlines and core inflation, but also other measures of price growth.
The core personal consumption expenditure index — traditionally the Fed’s favorite indicator — rose 3.1 percent in April, although the Dallas Fed’s trimmed average PCE indicator rose a more modest 1.8 percent.
The US central bank has also developed a quarterly index of common inflation expectations to assess whether it deviates from its targets; the next lecture is in July. Despite those efforts, the uncertainty has startled some economists and investors.
“Overall, our baseline inflation scenario hasn’t changed, but our belief in that view should be lower,” said Lynda Schweitzer, co-head of the global fixed income team at Loomis Sayles. “We have to consider the risks of something more sustainable.”
And in Maryland, Cherner is optimistic about the outlook.
“I don’t see a steep drop-off” [in prices] until there is much more supply than demand,” he said. “They still have to build the new cars and get the chips in and take them out. I just think it’s going to take time.”