Surprise jump in used-car prices adds to Fed’s inflation worries

AN UNEXPECTED rise in used-vehicle prices last month has added to US car buyers’ frustration, and could dent hopes that inflations is headed lower, even as the Federal Reserve hikes interest rates.

Data from Manheim showed that the average price of used vehicles rose 2.5 per cent month on month in January, recovering some of last year’s 15 per cent decline. The company’s used-vehicle index in January fell 12.8 per cent from a year ago, although it has been creeping back up in the last two months.

The prices at auctions that are tracked by Manheim are a bellwether for the new-car market, so consumers have a reason to believe that carmakers and dealers will start applying discounts to vehicles that have never been so expensive.

Used-vehicle prices are high at auctions and in retail showrooms. The addition of a strong jobs report last week means it may take more action to tame inflation.

Omair Sharif, founder and president of Inflation Insights, said: “The market thinks inflation is at its peak. Used-car prices picking up steam is heading in the wrong direction.”

Used-car prices are one of the larger components of the US’ Consumer Price Index (CPI), making up 4.5 per cent of its core. Sharif said that every percentage point increase in the price of pre-owned cars translates to a five basis point rise in the overall inflation rate.

The pullback in inflation so far has largely been driven by goods. This has led central banks to shift their attention to the service sector, where they worry that a tight labour market will preserve upward pressure on wages and inflation.

Used-car prices, as measured by the CPI, fell in the last six months, aiding the Fed’s inflation fight. An uptick in prices means they will do just the opposite.

Stephen Scherr, chief executive of Hertz Global Holdings, said the company saw a big jump in prices over the past five weeks at both auctions and retail. He said that Hertz sells one-quarter of its fleet through its own dedicated retail channel and online retailer Carvana. Cars sold through those channels captured a 5 per cent to 7 per cent premium over auction prices, he said, adding that the company is selling all of its cars for more than book value. 

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“The snap back over the last four weeks has been more pronounced,” Scherr said. “There is clear stability and more of an uptick.”

Part of the rebound came from consumers returning to the market after prices eased from peak levels. Manheim said that used-vehicle retail sales were up 16 per cent in January from December, and rose 5 per cent from a year ago.

For consumers, all this means a longer wait for a decent price on a used car.

When Erik Larsen was shopping for a vehicle for his daughter, his search for something affordable took him from his home in Tulsa, Oklahoma, to Fort Worth, Texas. He flew into town in late December 2022 using airline points to check out a US$21,000 Mazda sport utility vehicle. 

When he showed up for the test drive, he discovered a chipped windscreen and dented fender. The steering was out of alignment and the brakes made a grinding noise. He passed. As he was leaving, he saw another prospective buyer testing out the same car.

Larsen, who works in management for a pipeline company, thinks it is prudent to keep monthly car payments under US$400, which is tough to do when the average used car requires payments of about US$570 a month. 

“I see the prices of vehicles and just wonder how people pay for them,” he said. “I know you can’t judge a book by its cover, but I’m sure most people driving the expensive cars have US$600 to US$1,200 a month payments. I just can’t do that.” BLOOMBERG