Feb 8, 2023
Surprise Used-Car Price Jump Adds to Fed’s Inflation Worries
(Bloomberg) -- A surprise jump in used-vehicle prices last month is adding to US car buyers’ frustration and has the potential to dent hopes inflation is headed lower even as the Federal Reserve hikes interest rates.
The 2.5% rise in average used-vehicle prices in January from December retraced some of last year’s 15% decline, according to data from Manheim. The prices at auctions tracked by the company often are a bellwether for the new-car market, so consumers have had reason to believe automakers and dealers will start discounting vehicles that have never been so expensive.
While Manheim’s used-vehicle value index was down 12.8% in January from a year ago, it’s now crept back up on a sequential basis each of the last two months. Used-vehicle prices are not only high at auction, but at retail showrooms as well. Add in a strong jobs report and it may take more action to tame inflation.
“The market thinks inflation is at its peak,” said Omair Sharif, founder and president of Inflation Insights LLC. “Used-car prices picking up steam is heading in the wrong direction.”
Used-car prices are one of the larger components of the Consumer Price Index, making up 4.5% of its core. Every percentage point increase from pre-owned cars means a five-basis point rise in the overall inflation rate, Sharif said.
The pullback in inflation seen so far largely has been driven by goods, leading central bank officials to shift focus to the service sector, where they worry a tight labor market will keep upward pressure on wages and inflation. Used car prices, as measured by the CPI, have fallen in the last six months, aiding the Fed’s inflation fight.
Now, a pickup in prices means they’ll be doing just the opposite.
Stephen Scherr, chief executive officer of Hertz Global Holdings Inc., said the company saw a big jump in prices over the past five weeks both at auction and in used cars sold at retail.
Hertz sells one-quarter of its fleet vehicles through its own dedicated retail channel and online retailer Carvana Co., Scherr said. Cars sold via those channels captured a 5% to 7% premium over auction prices, he said, adding the company is selling all of its cars for more than book value.
“The snap back over the last four weeks has been more pronounced,” Scherr said in an interview. “There is clear stability and more of an uptick.”
Part of the rebound comes from consumers returning to the market once prices had eased from peak levels. Used-vehicle retail sales were up 16% in January over December and rose 5% from a year ago, Manheim said.
For consumers, it means a longer wait for a decent price on a used car.
When Erik Larsen was shopping for a vehicle for his daughter, his search for something affordable took him from his home in Tulsa, Oklahoma, to Fort Worth, Texas. He flew into town in late December using airline points to check out a $21,000 Mazda SUV he was scouting.
When he showed up for the test drive, he discovered a chipped windshield and dented fender. The steering was out of alignment and the brakes made a grinding noise. He passed. As he was leaving, he saw another prospective buyer testing out the same Mazda.
Larsen, who works in management for a pipeline company, thinks it’s prudent to keep monthly payments under $400, which is tough to do when the average used-car car requires about $570 a month.
“I see the prices of vehicles and just wonder how people pay for them,” Larsen said. “I know you can’t judge a book by its cover, but I’m sure most people driving the expensive cars have $600 to $1200 a month payments. I just can’t do that.”
--With assistance from Reade Pickert and Craig Trudell.
(Updates with year-on-year data in third paragraph.)
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