Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Why Used Car Prices Are Falling But Your Car Loan Isnt
Transcript
- Lucas: So here's a puzzle for this week. Used car prices are falling — we've seen the Manheim Used Vehicle Index drop for three straight months now. But if you actually go to buy a used car, your monthly payment is higher than it was a year ago. That's the disconnect I want to unpack today. Luna: I feel like I'm living that disconnect. I was looking at a three-year-old SUV last week, and the dealer kept saying 'prices are down five percent,' but my estimated payment was actually up from last year. Lucas: Exactly. And the data backs that up. The CPI data we got for May — all items index at 334, up month over month — shows used car prices actually fell point three percent. That's a rare decline. But here's the thing: the price of the car is only one piece of the monthly payment equation. Luna: Right, interest rates. The Fed funds rate is still at three point six three percent, even if they've paused hikes for a while. Lucas: Exactly. And while the Fed rate is sort of the anchor, average auto loan rates are now pushing seven point five to eight percent for new cars, and north of eleven percent for used. That's up from like six percent used-car loans two years ago. So even if the sticker price drops a few hundred bucks, the financing cost more than eats that saving. Luna: So the Fed's hold is actually making it worse for borrowers? Because rates aren't coming down? Lucas: In the short term, yes. And it's not just the rate itself — banks have tightened lending standards significantly. The Senior Loan Officer Survey a few months back showed that a large share of banks are making it harder to get an auto loan, especially for people with subprime credit. So even if you qualify, your rate is higher than it would have been. Luna: So the car might be cheaper, but the money to buy it is more expensive. That feels like a wash for most buyers. Lucas: It's worse than a wash for a lot of people. Because there's a third piece: insurance. We talked about auto insurance as an inflation signal a few episodes ago, and it's still spiking. The CPI for motor vehicle insurance is up over eighteen percent year over year. That's not a car payment line item, but it's part of the total cost of owning the car. Luna: And repair costs. I had to replace a side mirror last month — it was seven hundred dollars. For a mirror. Lucas: That's exactly it. Repair costs are up because parts are more expensive and labor is more expensive. So insurance companies are raising premiums to cover those higher claim costs. So the total cost of ownership for a used car — purchase price, financing, insurance, maintenance — is still rising even though the transaction price alone is dipping. Luna: Okay, so then why are used car prices falling at all? If everything else is up, what's actually dragging the wholesale price down? Lucas: Good question. A big factor is that new car production has mostly recovered from the chip shortage era. Dealers have more inventory on lots, so they're offering incentives on new cars again. That pulls some demand away from used. Also, the wholesale market — where dealers buy cars at auction — has seen a flood of off-lease vehicles coming back. More supply, softer demand, lower wholesale prices. Luna: But that deflation isn't passing through to the retail buyer, because dealers are trying to keep their margins. Lucas: That's part of it. Dealers are holding retail prices higher than wholesale would suggest they should be. They're also making more on financing and warranties. So the Manheim Index drop is real, but it's not showing up in the CPI used car component as much, and definitely not in the monthly payment the consumer sees. Luna: So for the average person shopping for a used car right now, what's the practical takeaway? Should they wait? Buy new? What do the numbers say? Lucas: If you can wait, waiting probably helps. The wholesale price declines should eventually push retail prices lower — that's just a lag. Also, if the Fed starts cutting rates later this year or next, financing gets cheaper. But if you need a car now, the best move is to focus on total cost, not just the sticker. Get pre-approved from a credit union, compare the APR, factor in insurance quotes before you buy. Luna: And maybe don't fall for the 'prices are down' marketing line without running your own numbers. Lucas: Exactly. The headline is 'used car prices fall,' but the reality is more complicated. The CPI data shows the headline inflation number might be cooling, but the components that hit households hardest — like insurance and financing — are still running hot. Luna: Speaking of the CPI and making sense of these numbers, one thing I really appreciate about this show is how you take these dry indexes and connect them to real decisions. If walking through the economy with us has made something click for you, listener support is what keeps this podcast ad-free and independent. You can help at buy me a coffee dot com slash fexingo. That's buy me a coffee dot com slash fexingo. No pressure at all — just if you find value in what we do. Lucas: Absolutely. And it really does let us keep drilling into these specific disconnects without worrying about ad sponsorships. So thank you to anyone who's already chipped in. Luna: Alright, back to the puzzle. So Lucas, if the Fed does start cutting rates later this year, how quickly would that actually show up in auto loan rates? Lucas: It's not instantaneous. Auto loan rates are tied more to the bond market and bank funding costs than to the Fed funds rate directly. But if the Fed signals a cut, we usually see lenders start to ease rates within a few weeks. The bigger impact might be on the supply side — lower rates could bring more buyers back into the market, which could stabilize used car prices. So the deflation might not last long once rates come down. Luna: So the window for a good deal on a used car might be right now, before rates drop and demand picks up? Lucas: That's the tension. If you can get a low enough price on the car and you can stomach the current interest rate, you might lock in a cheap asset that appreciates — or at least doesn't depreciate further — once the cycle turns. But it's a bet on timing. The safe play is still to minimize total cost. Luna: What about leasing? Does that avoid some of this pain? Lucas: Leasing is interesting right now. Lease payments are based on the car's residual value, which is partly driven by used car prices. If used prices are falling, residuals drop, and lease payments actually go up. So leasing isn't necessarily cheaper. Plus, you still have the same insurance and repair cost issues. Luna: So really, there's no magic escape hatch. It's just a matter of understanding the math. Lucas: Right. And that's the core of inflation literacy. The headline CPI number — we're at 334 for May — tells you the average, but your personal inflation rate depends on what you buy. If you're in the market for a car, your personal rate is way higher than the headline. Luna: I think a lot of listeners might be surprised that used car prices are even falling. The memory of 2021 and 2022, when they were surging twenty, thirty percent year over year, is still pretty fresh. Lucas: Yeah, that was a once-in-a-generation spike. We're normalizing from that, but normalizing doesn't mean cheap. It just means less insane. The Manheim Index is still about thirty percent above where it was pre-pandemic. So even with the recent declines, we're not back to normal by any stretch. Luna: And what about electric vehicles? They've been seeing some big price cuts — does that change the used market? Lucas: It does, specifically for EVs. New EV prices have dropped significantly because of Tesla's price cuts and increased competition, which pushes used EV prices down even faster. But that's a separate segment. For the mainstream used car market, EVs are still a small share. The bigger effect is on residual values for EVs, which are a risk for lessors. Luna: So if I were to sum up this episode in one line: used car prices are down, but your total cost to drive is still up because of financing, insurance, and repairs. Sound about right? Lucas: That's the headline. And the next thing to watch is whether the wholesale price declines eventually force retail prices down enough to offset the financing cost. That would be the turning point for affordability. Luna: And we'll keep watching the CPI and the Fed. Thanks Lucas. Lucas: Thanks Luna. For everyone listening, we'll be back tomorrow with another angle on the numbers that shape your wallet.