Rapidly rising inflation in the U.S. is bound to slow soon — if just because the cost of used cars and trucks can’t keep rising astronomically.
Used-vehicle prices soared by 10.5% in June, following similarly strong gains of 7.3% in May and 10% in April. The increase in June was the biggest since the government began keeping track in the first year of Dwight Eisenhower’s presidency in 1953.
Here’s another shocker: In both June and April, the spike in used-vehicle prices accounted for about one-third of the overall increase in the cost of living.
Just how unusual is this?
In the first six months of 2021, the cost of used cars and trucks has soared by 32%. By contrast, their prices fell by an average of 0.6% a year from 2009 to 2019.
The cost of used vehicles has skyrocketed because of an unusual combination of high demand and low supply brought on by the pandemic. This mismatch is sure to fade as the economy recovers.
Indeed, a closely followed industry measure of wholesale used-car prices fell in June after four straight months of record increases.
The roots of the problem formed last year after rental-car agencies slashed purchases of new cars and trucks and automobile makers responded by cutting production. Early in the pandemic few people were driving regularly or traveling.
As vehicle manufacturers ramped up again late last year, they ran into a global shortage of computer chips that are essential in every new vehicle these days.
As a result, rental agencies could not buy all the cars they needed as Americans began to lease more vehicles again. Hertz
and others were forced to dip into the used-vehicle market to rebuild their fleets.
Flush with government stimulus money, many consumers who also wanted to buy new cars were forced to look at used options. At the same time, lots of people who no longer wanted to take public transportation or had moved out of cities in fear of the virus also began looking to buy cars.
Predictably, the crush of demand sent prices soaring.
As the chip shortage eases and automobile makers boost production, the mismatch between buyers and sellers will also go away. That will ease a lot of the recent upward pressure on U.S. inflation.
“Used-car prices are temporarily elevated because of very strong demand from stimulus payments, people returning to work, and limited supplies of new cars,” chief economist Gus Faucher of PNC Financial Services said. “Used-car prices will fall back to Earth later this year as new-car production picks back up.”
That’s not to say Americans shouldn’t worry about inflation.
The costs of lots of goods and services are on the rise, ranging from gas and groceries to dinner out and plane flights. It’s going to pinch household budgets at least through the end of the year.