As of April, the U.S. 12-month annual inflation rate was 4.2 percent. In the same period ending in April 2020, inflation increased 2.6 percent, according to the U.S. Labor Department.
A closer look at the data shows used-car prices increased 21 percent from April 2020 through April 2021, with 10 percent occurring in April 2021 alone. New-car prices increased 2 percent in the same time frame. While dealers' new- and used-vehicle inventories are greatly depleted, consumer demand is growing.
The primary factors influencing U.S. inflation over the past year have been the funding and early spending of multiple trillions of dollars on COVID-19-related federal government programs and roughly $2 trillion in Federal Reserve expansionary monetary policy since early in 2020.
In addition to traditional inflation causes, the following factors have fueled the boom in used-car prices, especially in the past four months.
1. Computer chip shortage. The global crisis is primarily due to disruptions in the manufacturing and supply chain. It has delayed the production and sale of new vehicles, forcing otherwise new-car consumers into the used-car market and therefore driving up prices due to increased demand.
2. Growth in GDP. After one of the worst first-half performances in U.S. history, the second half of 2020 registered one of the best back-to-back quarter performances in gross domestic product, with the economy growing 33 percent in the third quarter and 4.3 percent in the fourth.
The U.S. was one of the top performing economies during the COVID-19 global recession and is expected to be a top performer this year, according to the U.S. Bureau of Economic Analysis and the International Monetary Fund. The economy grew at 6.4 percent in the first quarter and is expected to grow 10 percent in the second, according to the Federal Reserve Bank of Atlanta.
Strong growth in the U.S. and global economies is putting pressure on raw materials and products. One of the strongest signs of recovery is that 13 million of the 21 million Americans who lost their jobs during the pandemic are working again.
3. Tax cuts. The federal reductions that were passed by Congress and signed into law in 2017 and took effect in 2018 have provided relief for most American taxpayers. H&R Block estimated the average personal tax cut was $1,200 based on the tax returns the company processed in 2018.
The savings have allowed greater household consumption.
4. Growth in wages. As the economy recovered, average wage rates in the U.S. in 2020 increased by 4.4 percent, according to the Bureau of Labor Statistics. Those additional dollars from productivity and wage growth have afforded more Americans the opportunity to buy a new or used car, again pushing prices upward.
5. Federal unemployment subsidies. A $600-per-week federal subsidy to state unemployment compensation was initiated during the early months of the COVID-19 recession and did not expire until July 31, while the current $300-per-week federal subsidy expires at the end of September, affording many unemployed workers the opportunity to purchase a used vehicle when normally they would not be able to do so.