The used-vehicle pipeline is messed up for years to come.

By Wolf Richter for WOLF STREET.

Used vehicle prices – retail and wholesale – had performed a historic 50%-plus price spike between mid-2020 through mid-2022 when consumers were suddenly willing to pay whatever; dealers saw it and jacked up their prices. And knowing that they could extract record profits from those bedazzled consumers no matter what the price, dealers were willing to pay whatever at auctions to replenish their inventory.  But starting in 2022, consumers gradually came to, and dealers had to respond. What followed was a historic plunge in used vehicle prices, both retail and wholesale, giving up about half of the price spike.

The CPI for used vehicle plunged by 20% from the peak, thereby giving up 57% of the 2020-2022 price spike. In 2022, when this plunge began, used-vehicle CPI weighed about 5% of core CPI. So that plunge contributed substantially to the “deceleration” of core CPI (deceleration = prices still rise but more slowly).

In trying to see where inflation is going, we’ve been watching this phenomenon carefully, knowing that used vehicle prices cannot plunge forever. And over the past few months, we saw sign after sign after sign from the wholesale side that they’d stopped plunging, then confirmed on the retail side by the September used-vehicle CPI which suddenly ticked up, after plunging for months. And that uptick, rather than a plunge, was in part why core CPI re-accelerated month-to-month for the third month in a row.

And there are more signs that the price plunge is over, that the dynamics in the used-vehicle market are tightening.

Used-vehicle retail inventory fell further.

Retail inventory of used vehicles at the start of October dipped to 2.15 million units, well below the 2019 range of 2.8 million to 3.0 million vehicles, and about 27% below September 2019, according to data from Cox Automotive today.

Supply to the used vehicle market of 2-to-3-year-old vehicles comes largely from rental fleets that take units out of service, lease returns when 2 or 3-year leases mature, and regular trade-ins. But this supply pipeline was severely disrupted at the beginning of the pipeline by the new-vehicle production cuts due to the semiconductor shortages. From Q2 2021 through Q1 2023, automakers sold 6 million fewer new vehicles than over the same period before the pandemic. These 6 million units didn’t go into the pipeline toward the used vehicle market and are now not coming out at the other end.

So in terms of future retail prices, this is not a good inventory situation. Dealers will be motivated to bid up auction prices to replenish their tight inventories, and then try to pass those higher prices on to consumers.

Wholesale prices in the first half of October.

Adjusted for seasonality, mix, and mileage, the Manheim Used Vehicle Value Index, which tracks prices of vehicle sold at auction, inched up in the first half of October, and if that holds for the rest of October, the index would be roughly stable for the third month in a row, after jumping in the two months before.

That left it down 2.8% from the whole month of October last year, the smallest year-over-year decline in 18 months. The index is now flat with January 2024. So it looks like the plunge has stopped.

Not seasonally adjusted, the index fell in the first half of October, but prices normally fall in October, and the drop so far was less than the normal drop in October. This whittled down the year-over-year drop to just 3.5%, from a 4.9% year-over-year drop in September, and from double-digit drops earlier in 2024.

“We have maintained the belief that wholesale depreciation will be a bit muted in the future, and that’s what we are seeing in the first 15 days of October,” Manheim said in the report. Manheim runs about 8 million vehicles a year through its auctions.

Used-vehicle retail listing prices.

The average listing price of used vehicles for sale at dealers also spiked during the 2020-2022 era and then started skidding lower. But in 2024, it has been fairly steady just above $25,000, including the uptick in September, according to data from Cox Automotive:

The first sign this is feeding into CPI.

The CPI for used vehicles, after plunging for months, did a U-turn in September and rose 0.3% from August, seasonally adjusted.

This month-to-month rise reduced the year-over-year drop by half, to -5.1%, from -10% in each of the prior three months.

From the data we have, it seems the plunge of the used vehicle CPI that was a big factor in the “deceleration” of core CPI has run its course. The pricing dynamics are normalizing, but inventories are tight, demand is solid, and increases in the used-vehicle CPI going forward would support a further re-acceleration of core CPI.

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