How Rising Used Car Prices Contributed To Inflation : Planet Money : The Indicator from Planet Money Used cars are expensive right now. Bloomberg writer Conor Sen thinks it might be a reason behind recent inflation. We explore how used cars got so expensive and used cars' relationship with the CPI.

Used Car Silver Lining: Indicators of the Week

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SYLVIE DOUGLIS, BYLINE: NPR.

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STACEY VANEK SMITH, HOST:

This is the INDICATOR FROM PLANET MONEY. I'm Stacey Vanek Smith. And it is Friday, time for Indicators of the Week. And this week, we have asked Conor Sen to join us. He is an investment adviser and former hedge fund analyst. He also writes for Bloomberg Opinion. And when I caught up with him this morning, he sounded a little flustered - said he was talking to me from his car.

Have a little crazy morning?

CONOR SEN: Yeah. I mean, my 3-year-old in particular - you just never know we're going to get from him in the morning.

VANEK SMITH: You just dropped your kids off. Is that right?

SEN: Yeah.

VANEK SMITH: (Laughter) So you're, like, in the day care parking lot. I don't know. Do you see anything interesting through, like, economic lenses?

SEN: At the day care parking lot? (Laughter).

VANEK SMITH: Yeah.

SEN: Yeah. One - I guess, you know, by having day care, I'm freed up to call people like you. So that's a mechanism for how day care can help drive productivity growth.

VANEK SMITH: That is true. That is true. I mean, indicators are everywhere, you know? They really are. But, Conor, you brought us a special Indicator of the Week that has nothing to do with day care but apparently does have something to do with cars. And I've heard it's good news, so I'm looking forward to hearing that right after the break.

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VANEK SMITH: Conor Sen, investment adviser and columnist at Bloomberg Opinion, talking to us from the day care parking lot, what is your Indicator of the Week?

SEN: It's the Manheim Used Vehicle Index, which sounds really exciting. I know.

VANEK SMITH: (Laughter).

SEN: But there actually is a reason why it is quite exciting.

VANEK SMITH: OK. OK.

SEN: It's related to inflation. And so everyone's been really concerned about inflation over the past few months.

VANEK SMITH: Yeah, inflation is basically prices rising.

SEN: Exactly. And it spooked the Federal Reserve in their June meeting to talk about maybe interest rate increases earlier than people expected, which spooked the markets. And a lot of that ties back to used vehicle prices in a strange way.

VANEK SMITH: Really?

SEN: Yes. So used vehicles are only 3% of the overall inflation index. But because of all the funkiness (ph) in the auto industry over the past years - in the past year, used vehicle prices are up 30% in the past year. So that little, small chunk of the inflation index has actually contributed a full percent to the overall measure of inflation.

VANEK SMITH: OK, so walk me through this. Three percent of the inflation index to used cars - what does that mean?

SEN: Yeah. So it's sort of a measure of what consumers spend on various stuff, so housing might be a third, and used vehicles would be about 3%.

VANEK SMITH: And what happened to that number?

SEN: It's gone up 30% in the past year.

VANEK SMITH: What?

SEN: And there are a couple reasons for this. So basically, if you bought, like, a 2014 car new, you might be able to get for it, you know, right now what you paid for it back then, even though it's a 6-year-old car.

VANEK SMITH: That's crazy. So what does this tell you? How does - like, what do you see when you look at this number?

SEN: So the reason why they're so expensive is because the production of new cars has gone down so much, which then pushes people into the used market which has driven up prices there.

VANEK SMITH: OK. From what I understand, there was, like, a microchip shortage. Is that what's - what caused the slowdown in production of new cars?

SEN: There are a few things. So that's the one that's currently weighing on it. Last spring, when everything shut down, they shut down the factories, and social distancing meant they couldn't produce as many cars. And then also, you know, people got stimulus checks which enabled them to buy cars. And also, the rental car companies sold off their fleets last summer because nobody was renting a car. And so they ran out of cars, and then they've been trying to get back into the market to restock. So it's sort of a variety of factors that have led to this.

VANEK SMITH: Also, I think a lot of people bought a car or wanted a car all the sudden because it was a way to travel...

SEN: Right.

VANEK SMITH: ...In, like, lockdown and quarantine.

SEN: Maybe you left the city and bought a house in the suburbs, and now you need a car or two. So that's been another factor.

VANEK SMITH: OK. So demand for cars is going crazy. This is all leading to an increase in used car prices.

SEN: Well, so the exciting thing is the June reading indicator just came out, and it fell for the first time since all this started.

VANEK SMITH: OK. I am looking at the index now. It looks like it fell by 1.3% in June compared to May. Let's go ahead and call that our Indicator of the Week - a 1.3% month-over-month decrease in the Manheim Used Vehicle Value Index.

SEN: (Laughter).

VANEK SMITH: Conor, you got to tell us what is going on here. Why are the prices of our, like, 2007 Honda Accords falling? What is happening?

SEN: Well, it could be that prices have gotten so high that some people are like, this is insanity; I'm not going to pay these prices. Production is slowly improving. Maybe demand is falling off as stimulus checks have - are now in the past. And so all these factors sort of - you know, sort of temporary insanity doesn't tend to last, and maybe we've hit that point in used vehicles.

VANEK SMITH: So you mentioned that you thought this was maybe good news. Why is this good news?

SEN: Because to the extent that policymakers are worried about inflation, this should give them peace of mind that this truly is a temporary thing. It's not going to last.

VANEK SMITH: Oh, that's interesting. So you think this is like a little signal, like a bellwether that, like, things are going to be OK, that prices are going to come back down...

SEN: Exactly.

VANEK SMITH: ...That they're not going to keep going up. Why used cars? Like, why is this a good indicator of what's going to happen to prices elsewhere in the economy?

SEN: Just because it's been such a huge impact on the overall measure inflation, and it's the - maybe one of the few markets where we can specifically say, this crazy thing happened; this crazy thing happened. And that's why we're here where we are now. And we should expect that to normalize, whereas maybe some other factors related to inflation, it's a little harder to say. I feel pretty confident that, you know, 2007 Honda Accords are not going to be crazy expensive for the rest of time.

VANEK SMITH: OK. Well, that's good. I mean, what about, though - wages have been going up a lot.

SEN: Yeah.

VANEK SMITH: And isn't that an argument on the other side, that maybe inflation is potentially a worry because people will have more money to spend on things like used cars and that could drive up the price?

SEN: That gets to sort of longer-run factors. So things like rents are finally going up again, and so maybe 12, 18 months from now, after we get off - roll off all these leases that were signed during the pandemic, rents have normalized or have even gone higher due to higher wages, to your point. But it's just that, you know, used cars have contributed so much to the measure of inflation that as that rolls off, that's going to have a huge impact on the data as a whole and at least give us maybe a six- or twelve-month reprieve.

VANEK SMITH: So it's, like, a little sign that maybe everything's gonna be OK, inflationwise.

SEN: I hope so. I think so, yeah.

VANEK SMITH: OK. Do you, like, look at cars differently now after all this?

SEN: It certainly sort of - it's always interesting when you have these idiosyncratic dynamics, and things go crazy for a while, and it's sort of a fun thing to analyze. But I do feel sympathy for people who are in the used car market and have to have a car now.

VANEK SMITH: OK, 'cause now is not the moment you would buy a car.

SEN: Definitely not. You know, if you have two cars and you can sell one, this is sort of your time to get the peak price for your junker that you've been looking to trade in and maybe get an electric vehicle down the road.

VANEK SMITH: You're in your car right now, right?

SEN: I am, yeah.

VANEK SMITH: When did you buy your car?

SEN: 2016.

VANEK SMITH: Oh. I mean, are you tempted to sell it?

SEN: I thought about selling it and just roughing it with ride-shares and, you know, whatever for a few months.

VANEK SMITH: Is there, like, a moment - is there an indicator that, like, when it changes, you will?

SEN: I think if there was an electric car that I wanted now, I would do the trade. But I'm not - I think I'm waiting another year or two on that. So I would sell a car - if you're undecided on selling a car, now is the time to sell, from a market standpoint. But you've got to make sure that you're in a good spot after you do that.

VANEK SMITH: Right, because then you have to buy a car.

SEN: Yeah.

VANEK SMITH: That's the problem, right?

SEN: ...People - right.

VANEK SMITH: (Laughter) Because then you have to replace it with something that might also be a little overpriced right now. So yeah, if you have an extra car, this is the moment to sell it.

SEN: Exactly.

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VANEK SMITH: Conor, thank you for joining us. Have a great weekend. And I guess, you know, be on the lookout for some used cars.

SEN: (Laughter) All right. You, too. Bye.

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VANEK SMITH: This episode of THE INDICATOR was produced by Jamila Huxtable with help from Josh Newell. It was fact-checked by Michael He. THE INDICATOR is edited by Kate Concannon and is a production of NPR.

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