New and Used Vehicle Prices & Overall Inflation

Today’s CPI release showed a 0.4% increase in August and a year-over-year gain of 3.8%.  That’s not good for an economy with so much slack in it.  Even core inflation (less food and energy) was up 2.0% over the past year – the fastest increase since November 2008. 

Food (which is, in fact, a “core” household purchase and accounts for a larger share of household expenditures as income declines) rose 4.6% year-over-year.  And, more telling, food consumed at home rose 6.0% in price, while the price of food purchases away from the home rose only 2.7%.  Prior to the recession, the cost of eating out was rising faster than the cost of eating at home.  Thus, although fancy restaurants may now be keeping a lid on their $45 entrees, that does precious little for households stretching to make their monthly used car payment.

And what about prices of those used vehicles?  They have risen 5.8% over the past year, according to the Used Vehicle CPI (versus a 4.1% increase in the Manheim Index).  The many inadequacies of the Used Vehicle CPI were noted in an earlier post (10/15/09), but what we are seeing now is primarily a reflection of the Used Vehicle CPI being based on a three-month moving average.  As such, it lags trends in the Manheim Index and should start to show smaller increases shortly. 

 

New vehicle prices, which were up 3.8% over the past year, will also show smaller increases as supplies return and more competitive pricing ensues in the fourth quarter.  Witness the pricing for the new Camry.

The increase in the New Vehicle CPI over the past two years has been faster than anytime since July 1995.  That explains much of the movement in used vehicle prices.  The graph below is explained in an earlier post (3/24/10).    

 

Comments

[cash for clunkers]

I think this ratio was expected. As we can see the increasing rates of vehicles and fuel, more people are moving to used vehicles which are easily affordable. For the used cars they do not have to take loans they can have the desired one on desired rate.

[Used Cars Minneapolis]

Part of it is indeed to rising fuel cost. However, the recession is another factor; people are holding on to their used cars longer and thus there is more demand than supply. The ones that are most in demand are the efficient used vehicles with good mpg; those are the ones everyone want.