Inflation Is Still High. Used Car Prices Could Help Explain What Happens Next

Surging prices for used cars have been a major driver of inflation this year. Now, there are signs those price hikes may be shifting into reverse — and that could provide important clues about where inflation is headed next.

The prices dealers pay for used cars at massive auctions across the country finally dipped in June after hitting record highs in each of the four previous months, according to the Manheim Used Vehicle Value Index.

Those drops in wholesale prices bode well for those in the market for a used Jeep. While retail prices for used cars still surged in June, the fall in wholesale prices suggest that what consumers pay will likely start to fall soon.

Such an easing in prices would be consistent with the Federal Reserve's argument that the recent surge in consumer prices is likely to fade as pandemic bottlenecks are resolved and demand returns to more normal levels.

It's a view that's shared by many economists, though not all, who fear accelerating inflation could prove harder to reverse.

The Labor Department reported Tuesday that consumer prices jumped 0.9% between May and June — the largest one-month increase since 2008. Surging prices for used cars and trucks accounted for more than a third of that inflationary spike.

On a year-to-year comparison, prices surged 5.4%, the highest in nearly 13 years.

For inflation to ease some factors the Fed believes to be transitory will need to ease, like used car prices.

Used cars have been in high demand this year, partly because of a shortage of new cars.

A severe global shortage of semiconductors hit automakers hard, forcing them to limit production despite surging demand.

That supply chain disruption has been magnified by the lingering impact of a deep freeze in Texas earlier this year that limited production of plastics used in cars, as well as by recent flooding in Michigan.

"It's just been a series of perfect storm events that have prevented the new vehicle production from getting back to normal," says Jonathan Smoke, who tracks car prices as chief economist for Cox Automotive. "And while that supply has been challenged, we've had surging demand" for cars as more people are driving for work and vacation.

The reduced selection of new cars has had a big spillover in the used market.

The retail price of used cars jumped 10.5% between May and June, following a 7% jump the month before.

In recent weeks, however, the buying frenzy has slowed. Inventory at used car lots has returned to more normal levels, and demand at wholesale auto auctions is less intense than it was earlier this year.

"It isn't that demand has completely cratered," Smoke says. "It is simply that we've gotten past what has been a crazy spring."

Wholesale prices for used cars have dropped more than 2% over the last four weeks. Smoke expects that by the end of the year, wholesale prices will have fallen 9% from their June peak.

Assuming retail prices follow a similar path, that would support the Fed's argument that higher inflation is being driven by temporary phenomenon like used car prices.

"This is the poster child illustration for transitory" price hikes, Smoke says.

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