Brace yourself for some sticker shock. Buyers looking for a used vehicle should prepare to hand over a little extra cash as prices are soaring nationwide.
Used car prices are up some 15%-25% compared to pre-pandemic price tags. States like Arizona, Georgia and Nevada are seeing increases beyond 20%, above the national average of 16.8%. In comparison, average prices rose just 0.2% from 2019 to 2020.
The bizarre spike, and its connection to the consumer price index (CPI) and inflation, has caught the attention of economists and used car salespeople alike.
"Why are used car prices up? It's the perfect storm," said Steve Wyett, BOK Financial® chief investment strategist. "Consumers have money to spend—and cars are something they want to spend it on. So demand is up."
He said the re-opening of the economy and the federal fiscal stimulus over the last 12 months means consumers have disposable income.
"And supply is all messed up. We have this massive chip shortage taking place that is reducing the supply of new cars," Wyett said. "The cars are built, but they don't have the computer chips needed to be able to complete them and ship them to dealers."
Used cars are also being snatched up by rental car companies. During the pandemic, many rental car companies declared bankruptcy and sold off their inventories, flooding the market with used cars, and prices collapsed.
With the economy opening up, the rental car companies have now switched gears, buying up cars so customers have something to rent.
"Anyone who has traveled recently knows getting a rental car at the airport is next to impossible," Wyett said. "Rental car companies are now adding to demand because they can't replace their inventory with new cars because of the chip shortage."
The changing used car sales business model is further driving prices up. Pandemic restrictions revved up changing consumer buying habits. Now, consumers are much more willing to buy a used car online and have it delivered directly to their house without ever having to talk to a salesperson.
"The growth of online used car selling and buying is bypassing the traditional used car market involving a dealership and salesman," said Wyett. "It's a direct-to-consumer model now, which allows for a lower cost structure. In turn, the online market is bidding up the price because they don't have to pay a commission."
What does this have to do with inflation?
Used car prices are one factor measured in CPI," said Wyett. "But it doesn't necessarily mean they are an indicator of economic inflation."
Experts don't expect that used car prices are going to continue to remain at this level for an extended period of time.
"This will all be leveled out," said Wyett. "Once new car manufacturers receive more chips, there will be a push of new car availability that will shift demand. That means used car prices will not stay at these levels."
And as fiscal stimulus and other sources of income wear off, it's unlikely we'll see this level of buying power and environment long term, he added.
"This is a short-term phenomenon," Wyett said. "It's interesting. It's having an impact. But this is one of those areas of the inflation picture that we would definitely say is transitory—it's not here to stay."
Wyett said the takeaway is simple:
- If you need a car, this is a tough time to buy one. But it's not going to last forever.
- If you've got an extra car sitting around, it might be a good time to consider selling it.
- If you're worried about inflation, know there may be an end in sight. This likely isn't a long-term trend, and it won't trigger higher inflation going forward.
Basics on Consumer Price Index
If you slept through your economics class, here's a refresher on CPI.
"Consumer price index is one of the measures of inflation in our economy," said Wyett. "It measures trends on used car prices, wages, food, energy, etc. CPI is a measure of what people are spending their money on. It tries to provide some sense of whether it's costing more or less money to live today than it did last month, last year, or five years ago."
Wyett said this index tries to measure how that cost of living compares to the amount of income people are generating.
"CPI could be viewed as an indicator of economic optimism," he said. "People tend to buy cars and houses and make bigger purchases when they are more confident about the future."
Used car prices are 2.5% of the total CPI, which doesn't sound like a lot, Wyett said. "In the 4.2% CPI that was reported last month, used car prices were over 1% of that—which is a big deal."
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