Why used car prices are driving up inflation

A pedestrian walks past a certified used car sales field in Alhambra, California, on January 12, 2022.

Frederick J. Brown | AFP | Getty Images

Although the president Joe Biden In what appears to be an early sign of peak inflation, used car prices continue to rise to levels not seen at any time in this century prior to the Covid-19 pandemic.

The Biden administration blames much of the rise in inflation in the country on the used car market. The problem the White House acknowledges is that it can’t help lower interest rates right now.

Over the past 20 years, the contribution of used cars to inflation has averaged zero. According to the U.S. Bureau of Labor Statistics, it is now up more than 1% year over year.

Consumer prices for goods and services rose 0.5% in December, while used car prices rose 3.5%. Based on a weighted calculation of price changes and U.S. demand for used cars, the Labor Department estimates used car prices contributed 0.112 percentage points to the overall 0.5 percent increase.

Used car prices also had a historically high impact on headline headline inflation, According to White House economic adviser Jared Bernstein. Bernstein, who is a member of Biden’s Council of Economic Advisers, wrote that he found the effect of used cars on headline inflation “significant and instructive.”

“It’s a reminder of how unusual the current inflation is,” he continued. “The world hasn’t forgotten how new (and therefore used) cars are produced, and we should expect the range to resume once potential supply constraints are eased.”

Reflecting the views of most economists, Bernstein wrote that the main supply chain issue responsible for used-car inflation and its impact on CPI data is a shortage of semiconductors used to make new cars.

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Economists say the backlog is due to the Covid-19 pandemic, which has shut factories around the world and disrupted shipping routes over the past two years. These logistical hurdles are cited as prime suspects for a 25% surge in used car prices in 2021, according to industry insights firm Cox Automotive.

But the pandemic has changed consumer demand for cars and forced hundreds of thousands of people to cancel or postpone travel plans in 2020. Thanks to vaccines and relaxed public health rules, entire people can schedule vacations and other travel at the same time.

“There’s still a lot of unmet need. It’s unmet need,” Charlie Chesbrough, senior economist and senior director of industry insights at Cox Automotive, told CNBC. “The U.S. market will continue to have very strong sales until new markets can rebuild to meet demand and provide enough product for everyone.”

Simply put: You can’t have a used car without a new car.

Cox Automotive reported that the average retail price of a used car hit a new record of more than $28,000 in December.

“I think there’s little reason to expect to see any kind of price drop in the used car market anytime soon,” Chesbrough said.

The president’s approval ratings have been falling in recent months, and many voters surveyed told CNBC and Change Research they are concerned about the way a Biden administration is handling the economy. Sixty percent of the survey’s 1,895 respondents said they disapprove of Biden’s handling of the economy, a 6-point drop from September.

But the White House is doing all it can to stress to Americans that it is doing what it can to remedy the price hike.

As Bernstein pointed out on Twitter, the White House is taking steps that may help ease pressure on auto prices in the long run. The pending U.S. Innovation and Competition Act passed by the Senate in June will pour billions of dollars into domestic chip production as Washington looks to curb Chinese dominance in the industry.

The potential advantage of a Biden administration is that inflation is expected to moderate organically, while the Fed wants to raise interest rates this year.

Used car prices typically rise in the spring, so Cox Automotive expects prices to continue to rise. But in the second half of the year, the company expects inflation to end and a more normal depreciation pattern to resume.

Bank of America economist Alex Lim told CNBC last month that starting in the spring, used-car prices and headline inflation faced some sharp year-over-year comparisons. The thinking is that if sellers raise used car prices in early 2021, they will have to raise the same percentage this year if inflation is to stay at the same level.

That’s unlikely, Lin said.

“Wholesale prices have risen by more than 60 percent since the pandemic,” Lim said in December. “So the question is: will we still see 60% next year?”

“I mean, I hope not,” he added. “But I think I would be skeptical about that.”