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By Wolf Richter for WOLF STREET.
Prices of used cars, SUVs, pickup trucks, and vans that were sold at auctions across the US jumped by 1.2% in August from July, seasonally adjusted, the second jump in a row after a long series of declines, according to today’s Used Vehicle Value Index by Manheim, which runs about 8 million vehicles a year through its auction lanes. The index is adjusted for changes in mix and mileage (red in the chart).
Not seasonally adjusted, wholesale prices jumped by 2.2% in August from July, to $18,719, the second jump in a row after a long series of declines, which whittled down the year-over-year decline to 4.6%, the smallest year-over-year decline since May 2023 (the drops maxed out in the double digits earlier this year).
This second month in a row of substantial price increases points at a potential end of the historic plunge of used-vehicle prices that unwound about half of the crazy 60% price spike during the pandemic. It indicates that used-vehicle prices may have hit bottom, that they may no longer push down CPI inflation as they’d done over the past two years, and that they may turn into an inflation headwind going forward.
Dealers buy at these auctions to replenish their used-vehicle inventories. Supply comes from rental fleets that sell some of the vehicles they pull out of service, from finance companies that sell their off-lease vehicles and repos, from corporate and government fleets, other dealers, etc.
The report by Manheim, a unit of Cox Automotive added:
“The trend of higher wholesale values at Manheim continued into August from July, as we saw prices appreciate every week except the last.”
“Sales conversion continued to rise and held at much higher levels than prior years for the month as more buyers came to markets to replenish supply for used retail inventory. We know lease maturities are on the decline, and used retail days’ supply has tightened over the last month. That will likely keep pressure on buyers at Manheim in the next several weeks.”
Used vehicle retail sales, in terms of the number of units sold, have grown by the double digits year-over-year this year, and inventories have dwindled (more in a moment), so dealers are bidding up auction prices to restock their retail inventory, and as they sell those units at higher prices, those prices will eventually be reflected in the used-vehicle CPI.
The importance for CPI inflation going forward.
The 55% explosion of the used-vehicle CPI from mid-2020 through early 2022 was a strong contributor to the surge in core CPI inflation over that period. Since mid-2022, used vehicle prices have plunged – both wholesale prices depicted above and retail prices – and the used-vehicle CPI has given up over half of the price spike and has been a substantial force in pushing down core CPI inflation.
Changes in wholesale prices – the prices dealers pay to restock their retail inventories – precede changes in retail prices as measured by the used-vehicle CPI by a couple of months as dealers try to pass on the higher costs to their customers.
The used-vehicle CPI, seasonally adjusted and not seasonally adjusted, dropped in July (we’ll get August CPI on Wednesday). So, through July, the price increases at the auction have not yet translated into increases of the CPI as CPI lags wholesale prices by a couple of months, and wholesale prices first rose in July, and now in August. So far, the used-vehicle CPI has helped pushing down core CPI. But this will likely flip going forward – that’s what wholesale prices are telling us.
Used-vehicle retail inventories dropped and are very tight.
Retail inventory at the end of July dropped to 2.17 million used vehicles, according to separate reporting by Cox Automotive, down from the prepandemic range of over 2.8 million vehicles, constrained by the reduced influx from off-lease vehicles – vehicles that were leased new two to three years ago with two- and three-year leases, whose leases are now maturing.
A month ago, Manheim put it this way:
“We are just beginning to see lower lease maturities for the key 3-year-old segment, and that impact will be felt over the rest of this year and into 2025 and 2026. As supply tightens for this key segment for the used vehicle market, we expect to see variances from historical average depreciation rates.”
August inventory data will be released in about a week, but from the Manheim report today, we can see that inventories tightened further by the end of August.
These are very tight inventory levels, amid strong sales growth, and this supply-and-demand situation on dealer lots, along with rising wholesale prices, suggest that the retail price declines may have bottomed out.
During the entire episode of the vehicle shortages, there were only five months when inventories were even lower.
Prices of EVs and ICE vehicles.
EV wholesale prices spiked by 5.1% in August from July (red in the chart below), while ICE-vehicle prices jumped “only” 2.0% (blue).
Used EVs had experienced a crazy 145% price spike from January 2020 through July 2022. At the time, Tesla-flipping was a phenomenon where people bought new Teslas and resold them at much higher prices as used vehicles. Tesla, by ramping up production and cutting prices in 2022, then largely killed Tesla-flipping.
This 145% spike of EV wholesale prices was well over double the price spike of ICE vehicles (+64%). About half of those price spikes have gotten unwound.
Auction prices of EVs were at or below ICE vehicles before the pandemic. But that changed in mid-2021 when EV prices out-spiked the spiking ICE-vehicle prices. Even after the big price drops back to earth, EV prices remain substantially higher than ICE-vehicle prices (not seasonally adjusted):
Since January 2020, EV wholesale prices are still up 70%, while ICE-vehicle prices are up only 35%. EVs make up only a small portion of total auction sales, so their impact on the overall price index is small: The index for all auction prices is up 35.5% since 2020, with EV prices up 70.2% and ICE-vehicle prices up 34.6%:
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The post This May Be the End of the Massive Deflation in Used Vehicles that Pushed Down Core CPI: Wholesale Prices Surge for 2nd Month amid Strong Sales Growth & Tight Inventories appeared first on Energy News Beat.
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