Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / Why Stagflation Is Reshaping the Used Car Market
Transcript
- Lucas: So you've probably noticed that car prices are still high, but maybe you've seen some dealerships with more inventory than they've had in years. That's the strange paradox of the used car market right now. Luna: I was just looking at the numbers—new car prices are up about eight percent year-over-year, but used car prices are actually down three percent from a year ago. That feels like a shift. Lucas: It is a shift, and it's one that's deeply tied to the stagflation environment we're in. High inflation, slow growth, and the Fed keeping rates at three point seven five percent after the Bank of England held steady too. Luna: Right—rates are high, and that makes financing a car more expensive. So demand for both new and used cars gets squeezed, but supply is finally catching up. Lucas: Exactly. During the pandemic, there was that massive shortage of microchips and other components, which crushed new car production. That pushed people into the used market, and prices skyrocketed. Luna: Yeah, I remember seeing stories about used cars appreciating like assets. People were selling their used cars for more than they paid new. Lucas: That was the extreme. But now, production has largely recovered. The latest data shows that auto output is back to pre-pandemic levels. So new car supply is up, and that's pulling demand away from the used market. Luna: Plus, the job market is still relatively strong—unemployment is at four point three percent, and job openings jumped to seven point six million in April. So people are working, but wage growth isn't keeping up with inflation. Lucas: Average hourly earnings are up to thirty-seven dollars and fifty cents, but when you adjust for inflation, real wages are actually flat or slightly negative. So consumers are feeling the pinch, and a big-ticket purchase like a car gets delayed. Luna: That's the stagflation dynamic: you have a labor market that's still tight, but the economy is growing at only one point six percent annualized. So people have jobs, but they don't have the confidence or the real income to spend freely. Lucas: And that's showing up in auto loan delinquencies. The data from the New York Fed shows that auto loan delinquencies have been creeping up, especially among younger borrowers. That's a sign that the financial strain is real. Luna: So dealers are sitting on more inventory, and they're having to offer incentives or lower prices to move cars. That's why we're seeing used car prices dip even as new car prices remain elevated. Lucas: There's also a supply-side factor: off-lease vehicles and rental car companies are returning to the market. During the pandemic, rental companies sold off huge portions of their fleets. Now they're buying new cars again and selling their older ones, which adds to used inventory. Luna: That's a big one. Hertz and Avis have been placing large orders with automakers, and those cars will eventually hit the used market in a couple of years. But even now, the off-lease volumes are rising. Lucas: The wholesale auction data backs that up. Manheim's used vehicle index, which tracks wholesale prices, has been declining month over month. That's a leading indicator for retail prices, so we should see more softening ahead. Luna: But does that mean it's a good time to buy a used car? Prices are still historically high, even if they're down from the peak. Lucas: It depends. If you can pay cash, you might find a decent deal because dealers are more willing to negotiate. But if you need to finance, the interest rate is going to eat into any savings. The average APR on a used car loan is over ten percent now. Luna: That's brutal. So the monthly payment might be higher than it was a year ago, even if the price is lower. Lucas: Exactly. And that's the trap of stagflation: even when prices moderate, the cost of credit keeps the real burden high. The Fed isn't cutting rates anytime soon, so this dynamic is likely to persist. Luna: It's interesting—this is one of those markets where the macroeconomic forces are playing out in a very tangible way. You can see it in the lots, in the financing offers, in the trade-in values. Lucas: We should mention, a lot of what makes episodes like this possible is that listeners like you support us directly. It's a small group, but it makes a big difference. Luna: Yeah, it's how we keep the whole thing ad-free and independent. If the show has helped you make sense of the economy, there's a link at buy me a coffee dot com slash fexingo. Lucas: No pressure, just a sincere thanks to anyone who chips in. It goes straight into research and production. Luna: Alright, back to cars. One thing I've been wondering: is there any segment of the used market that's holding up better than others? Lucas: Actually, yes. Trucks and SUVs are still relatively strong because demand for them is less elastic. People need them for work or family, and they hold value better. Compact cars and sedans are seeing the biggest drops. Luna: That makes sense. Also, electric vehicles are an interesting case. Tesla has cut prices on new models multiple times, which has dragged down used EV prices significantly. Lucas: Right. The resale value of a used Tesla has fallen pretty sharply, partly because of those price cuts and partly because the tax credits make new EVs more attractive. So if you're in the market for a used EV, you might actually find a good deal. Luna: But then you have to factor in battery degradation and the fact that charging infrastructure is still spotty in some areas. So it's not a straightforward decision. Lucas: Nothing is straightforward in this economy. The broader point is that the used car market is a bellwether for consumer health. When people stop buying cars, it usually means they're pulling back on other discretionary spending too. Luna: And with the CPI still running hot—core CPI at three hundred thirty-six point one in May, up from the previous month—consumers are feeling the squeeze across the board. Lucas: So the used car market is one of those areas where you can see stagflation in action: high prices, high rates, slow growth, and consumers caught in the middle. It's not a crisis, but it's a persistent drag. Luna: And for anyone thinking of buying or selling, it's worth watching those wholesale auction numbers and the Fed's next moves. That's where the signal is. Lucas: Absolutely. We'll keep tracking it. That's it for this episode of Stagflation Conversations with Fexingo.