Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Why Used Car Prices Are Climbing Again
Transcript
- Lucas: Luna, I need to ask you a question that's been nagging at me. When was the last time you looked at used car listings — like, actually browsed for a friend or family member? Luna: Honestly? Not since early 2022, when my cousin was hunting for a Honda Civic and everything was insane. I assumed that market had cooled down by now. Lucas: That assumption is what this episode is about. Because the data tells a different story. The April CPI report, released May 13th, showed that used car and truck prices actually rose month over month — up 0.6 percent. And that was after a 2 percent jump in March. Luna: Wait, so the narrative that vehicle prices are normalizing — that's wrong? Lucas: It's more complicated. Overall CPI is running at an annual rate around 2.2 percent if you look at the headline number. Core CPI, excluding food and energy, is a bit higher — 3.1 percent. But within that, auto prices are a real outlier. And it's not just one month of noise. The trend has been firming for several months. Luna: So what's driving it this time? Because the original supply chain crunch from COVID is, what, four years behind us now? Lucas: Right, but those years created a massive hole in new car production. We lost roughly 4 million units of production globally between 2020 and 2022. That means there are fewer cars that are three to four years old coming off lease and entering the used market today. And that's the sweet spot for used car buyers — the 2019, 2020, 2021 model years. Luna: So the shortage of new cars back then is now translating into a shortage of used cars now. Lucas: Exactly. And then you add the current geopolitical layer. The Iran conflict has disrupted shipping lanes in the Persian Gulf and the Red Sea. That affects parts supply for automakers, especially in Europe and Asia. Some assembly lines have had to slow down. That puts additional pressure on new car inventories, which pushes more buyers into the used market. Luna: And higher interest rates — the Fed funds rate has been around 3.62 percent — that makes financing a new car more expensive, so people who might have bought new are shopping used instead. Lucas: Bingo. The average rate on a new car loan is north of 7 percent right now. For used, it's even higher — around 11 percent — but the lower principal still makes the monthly payment more manageable. So demand for used cars is actually rising even as supply is constrained. Luna: Okay, so the supply-demand math checks out. But I remember during the pandemic, rental car companies sold off huge fleets to stay afloat. Does that affect this at all? Lucas: It does, but in a delayed way. Rental companies like Hertz and Avis sold hundreds of thousands of cars in 2020 and 2021. That flooded the used market temporarily, which helped depress prices back then. But now those companies are rebuilding their fleets, and they're competing with consumers for the same limited supply of new cars. That actually reduces the number of cars that eventually flow into the used market a few years down the line. Luna: So we're in this weird feedback loop where every part of the system is pulling in the same direction — toward higher used car prices. Lucas: Right. And the data confirms it. The Manheim Used Vehicle Index, which tracks wholesale prices, was up in April for the third consecutive month. That's a leading indicator. What wholesalers pay today shows up on dealer lots in four to six weeks. Luna: What about EVs? I've seen headlines that Tesla prices have been dropping. Does that spill over into the broader used market? Lucas: It's a mixed bag. Tesla did cut prices on new models repeatedly last year, and that pushed down used EV prices. But that's a relatively small segment of the overall used market — maybe 2 to 3 percent of transactions. And many EV buyers are different from the typical used car buyer. So the effect is real but contained. The mainstream used car market is still driven by gasoline-powered sedans and SUVs from Toyota, Honda, Ford, Chevrolet. Luna: So if someone is in the market for a used car right now, what's your advice? Wait? Or buy now before prices go higher? Lucas: That depends on their timeline. If they need a car in the next three months, I'd say buy now because the trend is upward. If they can wait a year, there's a chance that new car production finally catches up. The chip shortage has eased, but new headwinds from the Iran situation could keep things tight. So it's not an easy call. Luna: And this is exactly the kind of concrete decision that makes inflation feel so personal. It's not just an abstract CPI number — it's 'can I afford a reliable car to get to work?' Lucas: That's why we do this show. And speaking of which — I'll be honest, Luna. Producing daily episodes like this, with real data and context, takes a lot of time. And we keep it ad-free because we want listeners to get the information without interruption. A handful of people chip in monthly through Buy Me a Coffee at buy me a coffee dot com slash fexingo, and that literally helps fund making this many episodes. Luna: Yeah, and it's not a big ask. If you get value from understanding how the economy actually works, that's the place to support us. No pressure, just if it's something you want to do. Lucas: Exactly. And back to the topic — one more thing I want to watch. The consumer sentiment index hit a record low in May, according to the University of Michigan survey. That's partly driven by inflation fears tied to the Iran conflict. If consumers feel worse, they may pull back on big purchases like cars, which could eventually cool demand. But in the near term, the shortage is still the dominant force. Luna: So the paradox: inflation expectations drive sentiment down, but the actual spending behavior — at least for cars — remains strong enough to keep prices elevated. Lucas: That's the tension. And it's why the Fed can't just look at headline CPI and declare victory. The composition matters. Used car prices are a small part of the basket, but they're a bellwether for how supply shocks ripple through the economy. If this persists, it could keep core inflation stickier than the Fed wants. Luna: Alright, I'm going to check in with my cousin and see if she ever ended up buying that Civic. Maybe I'll warn her that prices might not be coming down anytime soon. Lucas: Worth it. And we'll keep tracking these numbers so you know what's happening in real time.