In December of 2009, the year-over-year increase in the New Vehicle CPI reached 5%. That was its fastest rise since January of 1987. Although the year-over-over percentage increase fell back in January and February of this year, the actual index (also shown here) still exhibits an upward trend that has lasted for more than a year.
As a measurement, the New Vehicle CPI has its critics and drawbacks (such as the difficulty of correctly incorporating incentive activity, making adjustments during model year changeover, and the necessity of calling all federally-mandated changes a quality improvement), but, still, it is a far superior measurement than is the Used Vehicle CPI (discussed in our 10/15/09 post). It is also a better measurement than another series that analysts sometimes use – the Federal Reserve’s G. 19 release – since that data represents only information from the
Wholesale used vehicle prices today are naturally a function of both current and past new vehicle prices. Pictured here is the imputed dollar change in the New Vehicle CPI (“imputed” because it is only reported as an index and, thus, an assumption must be made about one price point) versus the price change in wholesale used vehicle values as measured by the Manheim Index. Since the Manheim Index is not quality adjusted, and the New Vehicle CPI is, one would expect the used vehicle price series to show larger dollar increases over time – and it does. But we also see the strong correlation that theory would suggest between new and used vehicle prices. For simplicity, a 3 ½ year timeframe was used so that we could pick up the influence that both past and current new vehicle prices have on used vehicle values. If one were actually building a forecasting model it would be better to use two discrete time series for new vehicle prices – one contemporaneous and one lagged.
The recent rise in new vehicle pricing has certainly played a role in mitigating the impact of higher incentives in March. (The Manheim Index continued to rise through the first 23 days of March.) What is unknown is how much of the new vehicle price increase will eventually be given back. The restructuring of the auto industry suggests “not much” and that increases in the New Vehicle CPI will come down from their current spike, but remain well ahead of the flat-to-down years experienced during the previous decade. New vehicle prices should thus add another support to wholesale used vehicle values over the long term.
It is also interesting to note that although overall inflation is contained (total CPI up 2.1% over the past year, core CPI up 1.3%), personal transportation costs have risen much faster (new vehicles +3.5%, used vehicles +14.1%, gasoline + 36.8%, and motor vehicle insurance +4.9%). But, we’ll save that analysis for another post.