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The rising cost of used cars has been a major contributor to inflation this year, but there are signs those price hikes will soon be easing up. The amount dealers pay for used cars hit a peak last month, and it's falling. As NPR's Scott Horsley reports, it's one example of the Federal Reserve's argument that higher inflation is likely to be temporary.
SCOTT HORSLEY, BYLINE: The Manheim auto auctions are a massive clearinghouse, where nearly 6 million used cars change hands every year.
HORSLEY: If you buy a used car from a dealer, chances are good the dealer bought it at one of these auctions. Chief economist Jonathan Smoke, who's with the auction's parent company, Cox Automotive, says the prices paid here are a kind of stock ticker for the overall used car market.
JONATHAN SMOKE: The wholesale market is an incredibly efficient market, showing you any imbalances that might exist between demand and supply.
HORSLEY: Smoke says for much of this year, the market for both new and used cars was wildly out of balance. Carmakers just couldn't build cars fast enough. Besides the ongoing semiconductor shortage, there was the deep freeze in Texas which hurt plastic production and then severe flooding in Michigan.
SMOKE: It's just been a series of perfect-storm events that have prevented the new vehicle production from getting back to normal. And while that supply has been challenged, we've had surging demand.
HORSLEY: Since the pandemic, a lot of people would rather drive than ride the subway. They'd rather take a road trip than get on an airplane. And maybe they need a car to get around their new suburban neighborhood. That strong demand, coupled with limited supply, pushed the price of used cars to a record high in May, accounting for about a third of that month's overall inflation. But then the dam broke. The wholesale price of used cars peaked in June and has been coming down for the last four weeks. Smoke says buying at the auctions has been a little less frenzied over the last month, and there are now more vehicles to choose from on used car lots around the country.
SMOKE: Well, it isn't that demand has completely cratered; it is simply that we've gotten past what has been a crazy spring.
HORSLEY: And that's what the Federal Reserve is counting on when it argues the recent spike in inflation is likely to be transitory, a byproduct of surging demand colliding with pandemic bottlenecks. Over time, the central bank believes these market kinks will get worked out, and prices will ease. Smoke says evidence from the used car market seems to support that.
SMOKE: This is the poster child illustration for transitory.
HORSLEY: Of course, while used cars were a big factor in the May inflation number, they were only one factor. Other prices will be in the spotlight today when the June inflation figure is released. As travel recovers from its pandemic slump, for example, we could see higher prices for hotel rooms, airline tickets and rental cars - oh, and don't forget gasoline to power those cars. AAA says gas prices are now averaging nearly $3.15 a gallon, and they could climb another 20 cents this summer. Even so, auto club spokeswoman Jeanette McGee says travel over the Fourth of July weekend was the highest it's been in more than 20 years.
JEANETTE MCGEE: We do not expect these higher gas prices to keep people off the road. They are definitely going to venture out and enjoy their beach time and their time with family and friends. It's just going to be one of those summers where Americans are going to pay a little bit more and enjoy the time away.
HORSLEY: As demand grows for travel, entertainment and in-person services, demand for a lot of goods could start to taper off, putting downward pressure on those prices. Smoke says the wholesale price of used cars has already dropped by 2% from its peak and could fall by 9% in the coming months, helping to put the brakes on inflation during the second half of this year.
Scott Horsley, NPR News, Washington.
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