The wholesale price of used cars is falling off a cliff while the retail prices that car shoppers are paying is way up, suggesting dealers are making a killing while consumers are taking a bath.
Used car prices declined 2 percent from September in the first half of October and are down 10.3 percent from a year ago, according to The Manheim Used Vehicle Index published on Monday.
Wholesale used luxury car prices are down 13.5 percent while used sport utility vehicles are down 12.3 percent and pick-up trucks are down 8.4 percent.
Meanwhile, the retail price that car shoppers are paying for used cars has increased 7.2 percent since last year, according to the Department of Labor’s latest consumer price index.
The fact that dealers are paying less for cars than they were a year ago while shoppers are paying more suggests that dealers are holding onto the difference and are driving inflation in the used car market, economists say.
“Dealers don’t have to pass it on. They can make bigger profits,” Claudia Sahm, a former Federal Reserve banker and founder of Sahm Consulting, said in a message to The Hill.
“At the end of the day, inflation and how much prices go up – these are decisions made by businesses. Inflation does not just come down from on high,” she said in an interview. “You’re in a capitalist economy, so whether it’s a small business or corporation, they get to decide when they pass a price increase or a price decrease on.”
“The Fed knows that import prices are falling, producer prices have really decelerated overall, wage growth has slowed down some though there are still labor costs, but disinflationary factors will eventually show up in consumer prices,” she added.
Economist Dean Baker of the Center for Economic Policy and Research (CEPR) said the difference between wholesale and retail prices in the market for used cars “likely is in part margins, but also a lag.”
“If a dealer paid $5000 for a car that today would sell for $4500 in the wholesale market, they probably will still look to get a price that compensates them for the $5000 they paid. That might mean there is a month or two for prices in the retail market to adjust to prices in the wholesale market,” he told The Hill.
More broadly, however, economists have noted increasing profits during the pandemic.
“It is … important to remember that we had a large shift of income shares from wages to profit in the pandemic. We can argue whether this was due to the exploitation of monopoly power or simply an outcome of shortages created by the pandemic and the war [in Ukraine], but the shift to profits is undeniable,” Baker wrote in a recent blog post.
Mark Schirmer, director of public relations with Cox Automotive, which publishes the Manheim Used Vehicle Index, said he expects auto prices to decline in the short term, with retail prices following drops in wholesale prices, but that auto prices will remain elevated over the longer term.
“We still think that with new vehicle inventory still low, we’re not expecting retail prices or wholesale prices to crash, but we certainly expect for them to come down some,” he said in an interview with The Hill.
“We’re not expecting a huge correction. They’re going to stay historically elevated for a while,” he added.
The marked contrast in the directions of pricing trends in the used car market comes as the Federal Reserve is hiking interest rates in order to bring down inflation. Federal Reserve officials say that by increasing interest rates, they will bring down demand and that lower demand will bring down prices.
“In the United States, we … have a demand issue,” Federal Reserve chair Jerome Powell said during a press conference last week at which he announced another three-quarter percent rate hike. “We’ve got an imbalance between demand and supply, which you see in many parts of the economy. So, our tools are well suited to work on that problem.”
But some economists are asking the Fed for further details about how they expect these dynamics to work.
“Powell’s public remarks offer little insight into how he expects higher rates to tame inflation,” UBS economist Paul Donovan wrote in the Financial Times last week. That’s important because “today’s price inflation is more a product of profits than wages.”
“Companies have passed higher costs on to customers. But they have also taken advantage of circumstances to expand profit margins. The broadening of inflation beyond commodity prices is more profit market expansion than wage cost pressures,” Donovan wrote.
Commodity price increases, especially in the energy sector, are driving inflation at the international level. The United Nations Conference on Trade and Development says that current inflation “derives largely from cost increases, particularly for energy, and sluggish supply response” that has been “amplified by price-setting firms in highly concentrated markets raising their mark-ups.”
But at the national level, the Fed’s “demand issue” has economists looking at the labor market as well as consumer spending habits to predict when the central bank will stop raising interest rates.
“The most important argument against further rounds of aggressive rate hikes by the Fed was in the wage data. After seeing moderate growth in the hourly wage in both August and September, we got another moderate number for October. If we take the annualized rate over the last three months, it comes to 3.9 percent, that’s down from an annual rate of more than 6.0 percent last fall,” CEPR’s Baker wrote.
Kansas City Federal Reserve president Esther George said in an interview with National Public Radio (NPR) last week that excess demand in the economy is also due to extra household savings.
“We see today that there is a bit of a savings buffer still sitting for households, that may allow them to continue to spend in a way that keeps demand strong,” George told NPR. “That suggests we may have to keep at this for a while.”
Updated at 5:02 p.m.