Economic restrictions related to the COVID-19 pandemic are being loosened, and economic activity is beginning to pick up. That’s expected to generate temporary increases in consumer price inflation. Over the past few months, prices for energy commodities and services have increased. But the largest monthly change in the April 2021 CPI belonged to another sector: used cars and trucks.
The FRED graph above shows that year-over-year growth in used vehicle prices reached 21% in April 2021, up from an already elevated 9.4% in March 2021. This is especially remarkable given that the general increase in the price level as of April was 4.2%. Used vehicle prices haven’t increased this much since December 1981, when they measured 21% and general inflation was 8.9%. Prior to 2020, the last time used vehicle prices had a monthly increase of more than 10% was between September 2009 and 2010. So how did this come about?
Comparing Beige Books in 2020 and 2021
A look back at economic conditions a year ago can help shed some light. In the April 2020 Beige Book, compiled around the time the country initiated restrictions on economic activity, auto dealers reported “significantly lower used car prices and a greater tendency to sell new cars for less than their sticker price.” Rental car agencies, the largest seller of used vehicles, responded to the lack of demand for their services by offloading excess inventory of used vehicles, increasing the supply of used vehicles and putting downward pressure on their prices.
The April 2021 Beige Book, however, tells a very different story. With demand recovering, rental companies are building up their fleets again, leaving fewer options for other used vehicle buyers. Not only has consumer spending activity increased moderately, lack of new vehicle inventory has been a “major issue,” in part due to semiconductor shortages that have created supply chain issues for vehicle manufacturers. All this has pushed more consumers to consider purchasing used vehicles. In the past, a glut in the supply of new vehicles would be absorbed into the used vehicle market over time, keeping prices low with a steady supply of off-lease and trade-in vehicles.
Trends over time
This blog has discussed trends for vehicle sales in general, but let’s stick with used vehicle prices and add some historical context. Before the current recession, annual growth in used vehicle prices hadn’t hit 3% since May 2012 and remained largely flat during the period from 2013 to 2020. Indeed, this trend goes back well over two decades: As measured by the CPI, used vehicle prices were largely flat or falling going back to 1997.
So the current spike in prices feels more like a correction after a lengthy stretch of falling prices. A 21% annual rise in prices is extraordinary, but it came about due to a unique and unprecedented set of economic conditions now impacting the supply of vehicles. Looking at how and why it happened gives us a better understanding of where things stand.
How this graph was created: Search FRED for “CPI new cars” and click on the right series. From the “Edit Graph” panel, use the “Add Line” tab to search for and select “CPI used cars.” Select units “Percent change from year ago” and click on “Select for all.” Finally, restrict the sample to start in May 1996.
Suggested by Nathan Jefferson.