In the early stages of the pandemic, stimulus checks and other factors made vehicles a popular large purchase for households. But disruptions in supply chains resulted in a shortage of new vehicles, which are strongly reliant on global supply chains. The shortage in semiconductors played a big role here, given their importance in the production of cars and their components. New vehicle production slowed down as a result, decreasing inventories and increasing prices.
The reopening of the economy and the shortage of new vehicles increased demand for used vehicles, which led to substantial inflation. Indeed, over the course of the pandemic, used car inflation was considered a major driving force of headline inflation.
In January 2022, however, the trend reversed: Used car inflation has started to decline. And, as supply chains are returning to normal, new cars have become more readily available and the excess demand previously directed toward used cars has shifted back to new cars.
Used cars dealers had been setting their prices or selling their cars at auction for a profit, but they’re now forced to negotiate with buyers, thus pushing prices down. Whether or not these trends continue in the medium term will partially depend on how supply chain disruptions will affect the manufacturing of new vehicles.
How this graph was created: Search FRED for “CPI Used Vehicles” and select “Consumer Price Index for All Urban Consumers: Used Vehicles and Trucks in U.S. City Average.” From the “Edit Graph” panel, change the units for both lines to “Percent change from a year ago.”