Moneybox

Used Car Prices Have Finally Run Out of Gas

Used cars on a lot in California.
The days of paying new car prices on used car lots may be over soon. Justin Sullivan/Getty Images

Surging used car and truck prices have been Exhibit A for the bizarre supply-chain snarls that have caused inflation to shoot up this year as the economy has begun shaking off the effects of the coronavirus crisis. The rapidly rising cost of shopping for a certified, pre-owned Ford or Honda accounted for a whopping one-third of the steep overall increase in the Consumer Price Index during the spring and early summer. Overall, the inflation numbers—the likes of which haven’t been seen in decades—have become something of a political liability for the Biden administration while putting pressure on the Federal Reserve to start tightening its approach to monetary policy.

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But now, the unprecedented run-up in the used car market finally seems to be running out of gas. Partly as a result, inflation on the whole slowed down a bit as well last month.

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On Wednesday, the Bureau of Labor Statistics reported that used vehicle prices increased just 0.2 percent in July. That’s down from a 10.5 percent increase in June alone, which helped cap off a 30 percent increase since the start of the year.

Used Car Prices
Federal Reserve Bank of St. Louis
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Without the extra boost from the used car market, overall inflation mellowed a bit as well. Excluding volatile food and energy prices, the CPI increased by 0.3 percent in July, about one-third of June’s pace. Consumer prices are still on pace to rise faster this year than Americans have become accustomed to in recent decades, and other inflationary pressures, such as a widely anticipated pickup in the cost of rent, could emerge. But last month’s sudden deceleration supports the argument made by Federal Reserve Chair Jerome Powell, among others, that the recent uptick in the cost of living has just been a temporary byproduct of the pandemic, rather than the start of a persistent problem that could spiral out of control.

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It isn’t a total surprise that used car prices have finally slowed their roll. They had been forced up in recent months by a complicated confluence of factors, beginning with a global shortage of semiconductors that has slowed down new car production and sent customers flocking to used lots. But prices at the wholesale auctions where dealers buy vehicles to stock their lots peaked in the spring, suggesting that the cost for shoppers would soon top out as well.

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Could prices actually go back down soon? That’s less clear. Analysts I’ve talked to say they don’t expect used cars to get much cheaper until the problems with new car production are finally ironed out, which could take well into 2022. Notably, new vehicle costs edged up 1.7 percent in July, which in normal times would be considered a large jump. The economy isn’t over its pandemic-era supply chain fits by a long shot, and now still isn’t a particularly great time to be looking for a deal on a CRV. But we are pumping the brakes on inflation—and hopefully the pundit mania it has inspired—just a bit.

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