'Canary in the Coal Mine': Slowing used-car market points to slowing US inflation

‘Canary in the Coal Mine’: Slowing used-car market points to slowing US inflation

Used vehicles make up 5% of the basket of goods used to track US inflation © Matthew Hatcher/Bloomberg

Later this month, Berman Auto Group will host what has become a rare event at an auto dealership over the past two years: a sales event.

In April, the company purchased about 150 vehicles when it opened another location in the Chicago metro area, bringing prices closer to a market benchmark that had soared since 2020. Vice Chairman Ross Berman then watched helplessly as used car prices began to drop, eating away at the dealership. profit margins for vehicles he had not yet sold.

“They’re a sign to me of everything that’s changed over the past few months,” Berman said. For Black Friday, the shopping bonanza after the Thanksgiving holiday, it’s offering zero percent financing. “We want to sell these cars.”

Rising used car prices have contributed to the worst US inflation in a generation. Government statistics show prices are 49% higher than in June 2020 at the start of the coronavirus pandemic.

While prices are still high by historical standards, gains are slowing sharply. In October, they rose 2% year on year, the US Bureau of Labor Statistics reported last week, compared to an annual rate of more than 40% at the start of 2022. On the online market Cars.com , the median price of a used vehicle in October fell more than 3% from a year earlier to $23,499.

Line chart of the 12-month change in the CPI for US used cars and trucks (%) showing how the used car rally has slowed

The drop has ramifications for manufacturers, dealers, lenders, buyers and potentially the wider economy as inflation shows signs of slowing.

The price hike of the past two years has been fueled by a shortage of new cars and trucks, as a global shortage of semiconductor chips limited the number of vehicles automakers could produce. The dwindling supply of new vehicles has forced more consumers to turn to the second-hand market, including car rental companies eager to replenish fleets they had reduced during pandemic shutdowns.

Today, an increased supply of new cars and trucks, along with rising interest rates as the Federal Reserve fights inflation, is driving down demand for used cars. Dealerships are cutting prices to keep car payments attractive to buyers, as higher borrowing costs make financing less affordable.

“The Federal Reserve made the decision to raise interest rates, and for better or worse, it’s doing its job,” Berman said. “It basically slows down consumer demand. The same vehicle at the same price today will cost the customer much more. This, by default, reduces demand on these cars.

Falling used car prices are being felt by both family dealerships and large chains. Two publicly traded dealerships, Carvana and CarMax, have both outperformed the S&P 500 stock index in 2020 and 2021, but this year CarMax’s share price has fallen 44% while Carvana’s has fallen by 96%.

S&P Global recently changed its outlook on Carvana to negative due to weakening profit margins, cash flow and liquidity. More than half of the dealership’s gross profit per unit comes from the sale of loans and other products, but Carvana is poised to lose some of that business.

“With rising interest rates, it’s harder for Carvana to compete with the big banks that can keep lending rates low,” said S&P analysts David Binns and Nishit Madlani.

The company should seek new capital to maintain liquidity in 2024, they added.

Falling used vehicle prices have traditionally been “the canary in the coal mine” for new cars and trucks, said Fitch Ratings analyst Steve Brown. They signaled a drop in demand for new vehicles, forcing price cuts and hence lower production from automakers.

This model may no longer hold. U.S. automakers made, on average, about 11.2 million vehicles a year in the five years before the pandemic, said Kristin Dziczek, an auto policy adviser at the Federal Reserve Bank of Chicago.

But the chip shortage has reduced production: they produced just under 9 million a year in 2020 and 2021 and are expected to produce less than 10 million this year. Since manufacturers have built fewer new vehicles in the past two years than consumers want to buy, lower used vehicle prices may not translate into lower car and vehicle prices. new trucks.

Automakers have also spent the past two years allocating rare chips to the most expensive versions of their most profitable vehicles, essentially dropping the bottom end of the market. Less affluent customers have turned to the used vehicle market. Automakers may be less inclined to cut prices even if supply rebounds “because the low-end buyer is out of the market,” Brown said.

At wholesale auctions, buyers are no longer willing to pay what sellers demand, said Omair Sharif, president of Inflation Insights, a forecasting and analysis group. The US used car consumer price index fell 2.4% from September to October.

With used vehicles accounting for 5% of the basket of goods used to track inflation, the decline in used vehicle prices in October subtracted more than a tenth from the underlying inflation rate, Sharif said.

“It’s going to become an anchor and drive the base rate down as we move forward.” While everyday purchases such as groceries further influence the perception of inflation, “even if you’re not buying a used car every week, it still helps to see that the data is falling.”

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