Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Reshaping the Used Car Market
Transcript
- Lucas: So you know how everyone has been talking about inflation coming down, but it feels like nothing actually gets cheaper? Well, there is one market where prices are really falling, and it's a place that boomed like crazy during the pandemic: used cars. Luna: Yeah, I keep seeing headlines like 'Used car prices drop again' but when I look at listings near me, they still seem high. Is that gap real or just my imagination? Lucas: It's real, and it tells us something about how stagflation is playing out at the consumer level. Let me give you the numbers. The Manheim Used Vehicle Index, which tracks wholesale auction prices, is down about 12 percent from a year ago. But retail prices, what you see at dealerships, have only fallen maybe 3 to 4 percent. That spread is unusual. Luna: So dealers are still charging high prices even though they're buying cars cheaper at auction? That feels like pricing power, which you guys talked about in a previous episode. Is that fading? Lucas: Not exactly fading here. Dealers are actually squeezing margins because they have to. Look at the financing side. With the Fed keeping rates high, the cost of floor plan financing, the loans dealers use to buy inventory, has gone way up. A dealer might be paying 8 or 9 percent to carry a car on the lot. So they need higher retail margins just to cover that cost. Luna: Right, and the consumer side is getting squeezed too. The average auto loan rate is pushing 7.5 percent for new cars, even higher for used. So buyers are tapped out. Lucas: Exactly. And that's the stagflation dynamic: slow growth, but costs stay elevated. On the one hand, wholesale prices are falling because supply is finally coming back. Off-lease vehicles are hitting the market in bigger numbers now that the 2021 and 2022 cars are coming off three-year leases. On the other hand, demand is weakening because wages aren't keeping up with the cost of everything else. Core CPI came in at 3.3 percent annual rate in April. That's still well above the Fed's target. So people are pulling back on big purchases. Luna: This might be a good moment to mention that the show itself is a bit like a used car market right now. We are trying to bring you value without any hidden markups. We keep the show ad-free and independent, and that's only possible because listeners chip in. If you find these conversations helpful, you can support us at buy me a coffee dot com slash fexingo. No pressure at all, just a way to keep the economics going. Lucas: Absolutely. And it really helps us keep digging into numbers like this. So back to that wholesale-retail gap. There is actually a second reason for the spread: the mix of cars is changing. At auction, the cars that are falling in price fastest are smaller, older, higher-mileage vehicles. But on dealer lots, they are still holding onto the low-mileage, late-model SUVs and trucks that command premium prices. So the average retail price is being dragged up by that mix. Luna: So the headline 'used car prices are falling' is true if you are looking at the whole market, but if you are a buyer wanting a specific type of car, you might not see it. That is almost like a microcosm of the CPI debate, where the average masks a lot of variation. Lucas: Exactly. And there's a third factor: the pandemic-era boom created a huge shadow inventory. Remember when rental car companies sold off fleets in 2020, and then couldn't buy new cars because of the chip shortage? Well, now they are buying again, and they are dumping those older cars into the wholesale market. That's been a steady source of supply for the last year. Luna: And what about the big online players like Carvana and Vroom? They seemed to be in trouble when interest rates rose. Are they still a factor? Lucas: They are a big factor, but not in a good way. Carvana especially was buying cars at peak prices in 2021 and 2022, financing them with cheap debt. Now that debt is expensive, and they are sitting on inventory they overpaid for. They've been cutting prices aggressively to move units, which depresses wholesale prices further. It's a vicious cycle. Luna: So for a consumer, is now a good time to buy a used car? Or should they wait? Lucas: That's the million-dollar question. If you need a car, it's probably a decent time to buy a late-model sedan or a compact car, because those are seeing the biggest wholesale drops. But if you want a three-year-old Ford F-150 or a Toyota RAV4, you are still paying near peak prices. The market is really segmented. Luna: And if you are financing, the interest rate might eat any savings on the price. So the total monthly payment might not change much. Lucas: Right. The average used car loan term is now 68 months. People are stretching payments just to keep the monthly number manageable. That's a classic stagflation behavior: you try to maintain your standard of living by taking on more debt, because your real income isn't growing. Luna: There was a JOLTS report this week showing job openings fell again, to 6.86 million. So the labor market is softening, but not collapsing. That might keep some people from buying cars altogether if they fear for their job security. Lucas: Exactly. And that feeds back into demand. The Manheim Index has fallen for six straight months. We are seeing a correction that looks a lot like previous post-recession patterns, but the difference is we are not in a recession. GDP growth annualized was 1.6 percent in Q1. That's slow, but positive. So this is happening in a slow-growth, high-inflation environment. Not a typical cycle. Luna: What does that mean for the broader economy? If used cars are a leading indicator for consumer durables, should we expect similar price drops in furniture, electronics, appliances? Lucas: Potentially. But used cars are unique because they have that two-market structure: wholesale and retail. And they have a financing component that's huge. Furniture and electronics are more tied to housing and discretionary income. But we have seen some softening in those categories too. The core goods deflation that we saw in late 2023 has stalled. Now we are seeing some goods prices actually rising again, but in a slower, more uneven way. Luna: So stagflation is not just about inflation and growth. It's about these weird disconnects within markets. The used car market is a perfect case study. Lucas: It really is. And it's a reminder that the Fed's job is harder when inflation is sticky in some sectors while others are deflating. They can't just look at the headline number. They have to watch the internals. And right now, the internals of the used car market are telling us that consumer stress is real, but it's not uniform. Luna: So what should we watch going forward? Any specific data point? Lucas: I'd watch the Manheim Index's month-over-month change, and also the spread between wholesale and retail. If that spread narrows, it might mean dealers are finally passing on lower costs. If it widens, it means financing costs are still squeezing them. Also, watch auto loan delinquencies. They've been ticking up, especially among subprime borrowers. If that accelerates, it could force lenders to tighten further, which would hit demand even more. Luna: And that would be another layer of stagflation: less credit, less spending, slower growth, but prices still high because of structural costs. Lucas: Exactly. The used car market is a bellwether for the consumer credit cycle. And right now, it's flashing yellow. Luna: Something to keep an eye on. Thanks, Lucas. That was really clarifying.