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Transcript
- Lucas: You know that moment when you get a trade-in offer from the dealer and you do a double take because it's actually higher than what you paid three years ago? Luna: That happened to me last month. I was genuinely confused. My car had thirty thousand more miles on it and somehow it was worth more. Lucas: Right, and that experience is a really good entry point into something strange happening in the inflation data right now. Headline CPI is slowly cooling — May came in at 334.0, up from 332.4 in April, so still rising but at a slower pace. Core CPI, stripping out food and energy, is also decelerating. But there's this one category that refuses to cooperate. Luna: Used cars and trucks. Lucas: Exactly. The used car index within CPI has been climbing month after month even as other categories like airfares and hotel rooms soften. Year-over-year, used car prices are still up something like eight to ten percent depending on the specific sub-index you look at. And the really interesting part is why. Luna: I remember during the pandemic, the narrative was all about semiconductor shortages stopping new car production, which pushed people into the used market, spiking prices. But chip supply has mostly normalized by now, right? Lucas: Mostly, yes. But here's the thing — the auto industry doesn't just flip a switch and go back to normal production levels. What happened is that during the shortage years, 2021 through 2023, there was a massive underproduction of new vehicles. The typical replacement cycle in the US is about twelve to fourteen years. So the cars that should have been built in those years are simply missing from the pipeline. Luna: So it's not just that fewer new cars were sold back then. It's that the entire fleet that would normally be entering the used market now, three to five years later, is smaller. Lucas: That's the structural piece. There's a supply hole that's going to take years to fill. According to some industry analysts, the US is roughly four million vehicles short relative to the normal replacement trajectory. And that deficit shows up most acutely in the two-to-six-year-old used car segment — which is exactly the sweet spot for most used car buyers. Luna: And meanwhile, demand hasn't actually fallen off a cliff. People still need cars. Lucas: They do. And there's a second dynamic here that's less discussed. Look at what's happening with fleet operators — rental car companies, corporate fleets, government agencies. During the chip shortage, they couldn't replace their aging fleets either. So they held onto vehicles longer, which pushed more miles onto existing stock, which accelerated depreciation on paper but also made them more reluctant to sell those cars into the wholesale market. That constrained supply even further. Luna: So the auction prices that dealers pay — those have stayed elevated. Lucas: Yes. Manheim's Used Vehicle Value Index, which tracks wholesale auction prices, has been hovering near historical highs. It dipped slightly in late 2024 and early this year, but it's bounced back in the spring of 2026. And that wholesale price feeds directly into what you see on the lot and what you get on a trade-in. Luna: Does the Fed care about used car inflation specifically? I mean, they target headline PCE, which includes used cars, but it's a relatively small weight. Lucas: It's a modest weight — about three and a half percent of the CPI basket, a bit less in PCE. But the Fed pays attention to it because it's one of those categories that tends to be more responsive to supply constraints than to demand-side monetary policy. Chairman Warsh, in his recent press conference, mentioned that certain durable goods categories remain 'stubbornly elevated' despite the rate pause. That was a clear reference to autos. Luna: So raising rates wouldn't really fix the problem if the issue is that there just aren't enough two-year-old SUVs to go around. Lucas: Exactly. Higher rates might cool demand a bit — make auto loans more expensive, squeeze household budgets. And we have seen some softening in new car sales because of financing costs. But the supply hole is the dominant factor. And it's going to persist until the production deficit from those chip-shortage years works its way through the system. Luna: How long do you think that takes? Another year? Two years? Lucas: Most estimates say the used car market doesn't fully normalize until 2028 or 2029. Because even if new car production returns to pre-pandemic levels — which it has, broadly speaking — it takes three to five years for those new cars to become used cars in volume. So we're still in the trough of that lag. Luna: That's a surprisingly long tail for what started as a semiconductor problem. Lucas: It really is. And it's a good reminder that inflation isn't just a monetary phenomenon. Supply chains have long memories. The price signals we see today are often echoes of decisions made years ago. Luna: Speaking of things that stick around — can I pause us for a second? Lucas: Sure. Luna: I was thinking about how episodes like this, where we dig into the real mechanics of a price trend, are exactly the kind of conversations I wish were more common. And the fact that we can do this without ads every five minutes is because of listeners who find value in it. Lucas: That's true. If today's conversation helped you think about your own car situation — or just understand what's happening in the economy a little better — the way these stay ad-free is through listener support. It's buy me a coffee dot com slash fexingo. Luna: It's a small thing that makes a big difference. And we really appreciate it. Lucas: Alright, back to the used car market. One more angle I want to look at — the investor side. Luna: Okay, because there are actually ways to bet on used car prices, right? Lucas: A few. There are ETFs that track auto-related companies — dealerships, parts suppliers, auction houses. CarMax and Carvana are the obvious public names. There's also a more niche play: companies that provide the financing and servicing for used car loans. When used car values stay high, the collateral backing those loans is stronger, which reduces credit risk. Luna: So the banks that do subprime auto lending might actually benefit from this supply-constrained market? Lucas: Potentially, yes. But you have to be careful. Loan performance also depends on the borrower's ability to pay, and if the broader economy slows, delinquencies can rise even if the collateral holds value. It's not a pure hedge. Luna: What about the inflation hedging angle that we usually talk about on this show? You mentioned real assets before — TIPS, commodities, gold. Does a used car fit into that framework? Lucas: Not really as an investment asset. You can't buy a used car ETF. But if you already own a car, its rising value is effectively hedging your personal transportation costs. That's a form of self-insurance against inflation — your asset is appreciating while you use it. That's unusual for a depreciating asset. Luna: It's almost like a reverse depreciation. Normally a car loses value the minute you drive it off the lot. Now it's gaining value on the lot. Lucas: Exactly. And that has implications for how people think about buying versus leasing. Leasing has become less attractive because the residual value — what the car is worth at the end of the lease — is hard to predict. Lessors have been raising lease payments to account for the uncertainty. Luna: So if someone is in the market for a car right now, what's the smart move? Buy new and hold it? Buy used? Lucas: If you can find a new car at or near MSRP — which is still possible for some models — buying new and planning to keep it for seven to ten years makes sense. The depreciation hit in the first few years will be smaller than historical norms, and you avoid the inflated used market premium. If you need a car now and can't wait, buying a three-to-five-year-old used car is expensive, but you'll likely recoup much of that when you sell it later. Luna: So the math is unusual either way. Lucas: It is. And the bottom line is that used car inflation is a textbook example of how supply-side shocks can create long-lasting price effects. The Fed can't build more cars. The market just has to work through the deficit. Luna: And in the meantime, your trade-in offer might keep surprising you. Lucas: Exactly. Which is a small silver lining in an otherwise frustrating market.