Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Why Used Car Prices Are Falling Faster Than New Cars
Transcript
- Lucas: So the June CPI came in at 332.6, down from 333.98 — a pretty clear sign that headline inflation is cooling. But if you dig into the components, there's one category that's really diverging from the rest: vehicles. Luna: And not all vehicles, right? I noticed that new car prices are basically flat, but used cars have dropped noticeably. Lucas: Exactly. The used car index actually fell more than 10% from its post-pandemic peak. New cars? Only about 2% off their highs. So we've got this growing gap between the two. Luna: That's a pretty big spread. And I think it affects how people actually feel inflation — because a lot of households buy used, not new. Lucas: Yeah, and that's the thing. The CPI basket weights new cars more heavily than used — something like four times the weight. So even if used prices crater, the headline index barely flinches. But for the average person, the used car market is where they're actually transacting. Luna: Right. So the official inflation number might be 332.6, but your personal experience could be very different depending on what you're buying. Lucas: And speaking of that difference — before we go deeper, I want to mention something. This show exists because a small group of listeners chips in a few dollars a month over at buy me a coffee dot com slash fexingo. No ads, no sponsors — just people who find this stuff useful. Luna: Yeah, it's a pretty straightforward model. Keeps us independent and lets us talk about whatever data we want without having to sell anything. Lucas: So if walking through the economy with us has made something click, that's the link. And now back to those falling used car prices. Luna: So what's actually driving the used car decline? Is it just more supply, or is demand falling? Lucas: Both, really. On the supply side, we're finally getting more new cars rolling off assembly lines after years of chip shortages. That means more trade-ins, more lease returns, more inventory at dealerships. On the demand side, high interest rates — the Fed funds rate is still at 3.63% — are making financing a new or used car much more expensive. Luna: So people are either holding onto their cars longer or opting for cheaper used models, which then pushes those prices down further. Lucas: Exactly. And there's another factor: the mix of cars coming into the used market. During the pandemic, rental car companies sold off a ton of their fleets to stay afloat. Those cars are now hitting the used market at the same time, which adds to the supply glut. Luna: So it's a perfect storm of more supply and weaker demand. But new cars aren't seeing the same drop — why? Lucas: New car prices are sticky for a few reasons. Manufacturers have been disciplined about production — they don't want to overproduce and then have to discount. Plus, the mix has shifted toward higher-trim, more expensive models. So the average transaction price stays high even if there's some discounting on base models. Luna: And import prices might play a role too. I saw that headline from July 17 — import prices from China hit their highest since 2008. So if you're importing parts or even whole vehicles, that cost gets passed on. Lucas: That's a really good point. The import price pressure is mostly on goods from China, but it also affects auto parts. And with the Trump administration proposing tariffs on generic drugs from 2028, there's a broader protectionist trend that could eventually hit auto components as well. Luna: So for now, used car buyers are getting a break, but new car buyers are still paying near-peak prices. How long do you think that gap will last? Lucas: Well, historically, used car prices tend to follow new car prices with a lag. But the current divergence is unusually wide. If the economy slows more — and the Beige Book from last week mentioned consumer warning signs — then used prices could fall further. But new prices might finally start to ease if demand weakens enough. Luna: Let's look at the core PCE, which is the Fed's preferred measure. It was 130.1 in May, up from 129.67. So that's still creeping up, even though CPI is falling. How do autos factor into that? Lucas: The PCE index uses a different weighting methodology than CPI. It gives more weight to used cars because it aims to capture actual consumer spending. So the used car decline actually shows up more in PCE, which might be one reason core PCE is still elevated — other categories like services are rising. But autos are a drag. Luna: So if you're the Fed looking at PCE, you see used cars falling, but other things like rent and insurance going up. That keeps you from cutting rates too quickly. Lucas: Right. And the 10-year breakeven inflation rate was at 2.28% yesterday, up from 2.26%. That's still above the Fed's 2% target. So even as headline CPI drops, market-based inflation expectations aren't collapsing. That suggests the disinflation is uneven. Luna: Let's bring it back to the listener. If you're in the market for a used car now, is it a good time to buy, or should you wait? Lucas: I think it's a decent time if you need one. Prices are down, and inventory is up. But if you can wait another six months, there's a chance prices go lower — especially if the economy slows and more people default on loans, flooding the market with repossessed vehicles. However, interest rates might not come down much in that time. Luna: So it's a trade-off between price and financing cost. For a new car, you're probably better off waiting for more discounts, but that's a bet on the economy weakening. Luna: But not if you're selling a used car right now. Lucas: No. If you're trading in, you're going to get less than you would have a year ago. But the trade-off is that the new car you're buying might also be slightly cheaper. It's not a great time to be on either side unless you're buying used. Luna: So the biggest losers in this inflation story are probably recent used car buyers who bought at the peak and are now underwater on their loans. Lucas: That's a real concern. With used car values dropping, loan to value ratios are worsening. If you financed a $30,000 used car two years ago and it's now worth $22,000, that's negative equity. And with rates high, refinancing isn't attractive. Luna: So this isn't just an inflation story — it's also a consumer credit story. And we haven't even talked about electric vehicles. Lucas: Let's go there. EVs are a whole separate ballgame. New EV prices have been dropping because of Tesla's price cuts and increased competition from Chinese manufacturers like BYD. That's pulling down used EV prices even faster than gas cars. So the divergence between new and used is even starker in the EV segment. Luna: And the import price data from China ties in there too. If Chinese EVs were to face tariffs, that could change the calculus. But for now, cheap Chinese EVs are putting downward pressure on prices globally. Lucas: Right. And the tariff proposal we saw this week is about generic drugs, not cars. But the broader protectionist trend is something to keep an eye on. For now, the used car market is providing a real-time case study in disinflation. Luna: So the key takeaway: headline CPI may be falling, but the composition matters. Used cars are a bright spot for consumers, but new cars remain stubbornly high, and the Fed's preferred PCE measure still shows stickiness. Lucas: And that's the reality of inflation in July 2026 — it's not a single number. It's a mosaic of different prices moving in different directions. Used cars are one of the clearest examples of disinflation working, but services like rent and insurance are still pushing the other way. Luna: So if you're wondering why your personal inflation rate feels lower or higher than the official number, look at what you're buying. If you bought a used car last year, you're probably feeling the relief. If you're renting, maybe not. Lucas: Exactly. And that's why we do this show — to help make sense of the data behind the headlines. Thanks for listening, and if you find it useful, you know where to find us. Luna: Buy me a coffee dot com slash fexingo. It really does help.