The record-breaking rise in used-car prices is probably coming to an end -- and with it a key driver of the recent spike in U.S. inflation.
The bellwether of the industry -- the wholesale market where dealers buy and sell in bulk -- has already topped out and prices of individual secondhand cars should follow in a matter of weeks, said Zo Rahim, industry analyst at Cox Automotive. Cox owns Manheim, the biggest U.S. auction house selling millions of vehicles every year.
Soaring prices for secondhand vehicles have helped push U.S. inflation to the highest in more than a decade. The cost of used cars and trucks climbed 10 percent in April, and another 7.3 percent in May when they were responsible for one-third of the overall rise in consumer prices.
All kinds of pandemic-driven shifts in supply and demand have contributed to the run-up. But there are signs that it may be peaking -- bolstering the Federal Reserve’s argument that the spike in inflation, as the COVID-19 pandemic eases and the economy reopens, will turn out to be largely transitory.
“Wholesale prices as of right now are at their peak and should start to come down,” Rahim said. “We are seeing a decelerating pace of price increases in the first two weeks of June, compared to what has been just an absolute surge.”
Prices for individual vehicles typically track the wholesale market, but with a lag, he said. That likely means “a few more weeks of retail prices increasing, before they start to follow suit.”
Manheim’s wholesale index of used-vehicle value was 36 percent higher than a year earlier as of mid-June –- down from an annual rate above 50 percent in April. One effect of higher prices has been to push the average age of vehicles on U.S. roads up to a record 12.1 years in January.
The volatile U.S. auto market was cited by Fed Chair Jerome Powell in a House hearing on Tuesday to help explain the outlook for consumer prices.
“A pretty substantial part, or perhaps all of the overshoot in inflation comes from categories that are directly affected by the re-opening of the economy, such as used cars and trucks,” Powell said. “Those are things that we would look to stop going up, and ultimately to start to decline.”
He added a cautionary note: “These effects have been larger than we expected and they may turn out to be more persistent than we expected.”