Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / Why Stagflation Is Reshaping the Used Car Market
Transcript
- Lucas: So here's a number that caught my eye this week. The average transaction price for a new car in the U.S. hit just over forty-nine thousand dollars back in January. That's up about three thousand from a year earlier. Luna: Forty-nine thousand. That's almost the median household income in some states. Lucas: Right, and that's exactly the problem. New cars are pricing out a huge chunk of the market. Now, conventional wisdom says when new car inventory recovers and interest rates are high, used car prices should fall. But that's not what's happening. Luna: Yeah, I've been seeing that too. The Manheim Used Vehicle Index — which tracks wholesale prices — it's actually up about four percent year-over-year as of May. That's not a crash. Lucas: Exactly. So today I want to look at why used car prices are holding up in this environment — and what that tells us about the broader stagflation picture. Because this isn't just a car story. It's an inflation-stickiness story. Luna: Alright, walk me through it. What's the main driver? Lucas: Let's start with affordability. New car prices have been climbing for years. The average transaction price has gone from around thirty-eight thousand in 2019 to forty-nine thousand now. That's a twenty-nine percent increase in seven years. Luna: And wages haven't kept up. Average hourly earnings are at thirty-seven fifty — up maybe twenty percent over the same period. Lucas: So the gap widens. And on top of that, auto loan rates are hovering around six and a half percent for new cars, even higher for used. A monthly payment on a new car is easily eight hundred dollars now. Luna: That's a lot of people's rent payment. So they drop down to used. Lucas: They do. But here's where the stagflation dynamic kicks in. Demand shifts to used cars — that pushes prices up. Meanwhile, supply of used cars is actually constrained. Luna: Because of the pandemic production cuts, right? Fewer new cars sold in 2020 and 2021 means fewer three-to-five-year-old trade-ins hitting the market now. Lucas: Bingo. New car sales in 2020 were about fourteen and a half million units, well below the typical seventeen million. That hole in production is still rippling through the used supply. And it's going to take years to normalize. Luna: So that's a structural shortage. But what about rental car companies? They usually flood the market with off-lease vehicles. Lucas: Good point. Rental companies sold off a huge chunk of their fleets during the pandemic to stay afloat. Then when demand came back, they struggled to buy new cars because of chip shortages. So they held onto their existing cars longer. Luna: Meaning fewer of those cars go to auction. I've seen data from Cox Automotive showing that rental risk units — cars coming off rental fleets — are down about thirty percent from pre-pandemic levels. Lucas: Which is a massive supply reduction. And then you have leasing. Leasing penetration dropped during the pandemic because monthly payments got too high and residuals were uncertain. Fewer leased cars means fewer off-lease vehicles hitting the used market a few years later. Luna: So it's like a triple squeeze: more buyers chasing fewer cars, with rental and lease channels dried up. Lucas: Exactly. Now, you'd think that high interest rates would cool demand — and they do for new cars. But for used cars, the interest rate effect is more complicated. Many used car buyers are subprime or have limited credit history. They're less sensitive to rate changes because they need a car to get to work. Luna: So demand stays inelastic. And on the supply side, higher rates actually discourage dealers from holding inventory. They want to turn cars fast to avoid carrying costs. That can push wholesale prices down temporarily, but retail prices have been sticky. Lucas: Sticky is the word. And that's a classic stagflation signal — prices that don't fall even when economic growth is sluggish. Real GDP growth in the first quarter was only one point six percent annualized. That's not strong. Luna: And CPI is still running above three percent. So we've got slow growth plus elevated inflation. Textbook stagflation, even if mild by 1970s standards. Lucas: Right. And the used car market is one of the clearest real-world examples of that dynamic playing out. It's not a financial asset — it's a necessity. People need cars, and if new ones are too expensive, they'll compete for used ones, and that keeps prices up. Luna: So what does this mean for someone shopping for a used car right now? Is there any relief in sight? Lucas: Probably not in the near term. The structural supply shortage is going to persist for at least another year or two. And if the economy stays in this low-growth, high-inflation zone, demand for used cars won't let up. The best advice I've heard is to look for cars that are three to four years old rather than one to two — there's more supply there from the pre-pandemic production years. Luna: And certified pre-owned might be worth a premium if you get a better interest rate through the manufacturer. Lucas: Good call. Also, consider buying from a private seller rather than a dealer — you can sometimes avoid the markup that dealers add for reconditioning and profit. Luna: You know, this episode reminds me why we keep this show ad-free. We want to talk about things like this without having to pitch a car loan or a credit card in the middle of it. Lucas: Absolutely. If walking through the economy with us has made something click for you, and you want to support that independence, the link is buy me a coffee dot com slash fexingo. It's a simple way to keep this going without selling your attention. Luna: Yeah, every bit helps. And we really mean it — no gimmicks, no merch, just a way to say this matters. Lucas: Alright, but let's pivot to something I think is really interesting — how the used car market is reflecting broader consumer pessimism. We mentioned affordability, but there's a psychological component too. Luna: You mean people are holding onto their cars longer because they're worried about the economy? Lucas: Exactly. The average age of vehicles on U.S. roads hit a record twelve and a half years in 2025. That's up from about eleven and a half years in 2019. People are repairing their existing cars instead of buying new ones. Luna: That makes sense. If you think your job might be at risk or inflation is eating your savings, you defer a big purchase. And that reduces the supply of trade-ins, which puts upward pressure on used car prices for everyone else. Lucas: Right. So you get this feedback loop: economic anxiety keeps people from trading in, which tightens supply, which keeps prices high, which makes new cars seem even more unaffordable, which pushes more people to the used market. It's a self-reinforcing cycle. Luna: And the JOLTS data from April showed job openings ticking up to seven point six million, but the unemployment rate is still at four point three. The labor market is tight but not booming. That kind of uncertainty doesn't inspire big spending. Lucas: No, it doesn't. And if you look at consumer sentiment surveys, they're still below pre-pandemic levels. People are cautious. So the used car market becomes a kind of canary in the coal mine for stagflation. Luna: Are there any segments of the used car market that are doing better? I mean, not all cars are equal. Lucas: Good question. Smaller, fuel-efficient cars have held their value well because gas prices are still relatively high. And trucks and SUVs — which are more expensive new — have seen slower depreciation because demand for used ones is strong. Luna: So basically, the whole market is elevated, but the most affordable end — subcompact cars and older models — those are the ones seeing the biggest percentage gains because they're what budget-conscious buyers can afford. Lucas: Precisely. And that's a tough situation for lower-income households who rely on a reliable car for work. They're the ones getting squeezed the most. Luna: I think the big takeaway is that stagflation isn't just a macro concept. It shows up in real markets like this, and it's hitting people where they live. Lucas: Yeah. And the used car market is a perfect lens to see how persistent inflation, high interest rates, and slow growth interact. It's not going away anytime soon. Luna: Alright, thanks for walking through that. I think listeners will have a much better sense of what's really going on when they see a used car listing. Lucas: Glad to do it. Stay tuned for the next episode — we're going to look at how all of this is affecting auto insurance premiums.