Already putting pressure on CPI inflation. Now comes tax-refund season.

By Wolf Richter for WOLF STREET.

Inflation pressures are rebuilding in used vehicles. Prices of used vehicles sold at auctions where franchised and independent dealers replenish their inventories rose by 0.4% in January from December, seasonally adjusted (red line), and by 0.6% not seasonally adjusted (blue line), according to the Used Vehicle Value Index by Manheim, the largest auto auction house in the US. The index is adjusted for changes in mix and mileage.

Since the low point in June, prices have risen by 4.9%, seasonally adjusted, and are at the highest level since October 2023. “While it’s not yet spring, wholesale values increased more than we usually see in the month of January, with particular strength at the end of the month,” Manheim said.

Supply at these auctions comes from rental fleets that sell vehicles they pulled out of service, from finance companies that sell their off-lease vehicles and repos, from corporate and government fleets, other dealers, etc. These prices are the costs for dealers, and prices that consumers pay, as tracked by the used-vehicle CPI, follow with some lag.

What’s coming now is tax-refund season, which is peak selling season for used vehicles as tax refunds make great down payments. During those months, demand surges, and prices rise, and the whole industry is licking its chops. But inventories are tight this year. And even if it’s just the typical surge in tax-refund-season demand, it will put further upward pressure on prices.

But demand is already starting out hot. Used-vehicle retail sales in January were up by 15% year-over-year, according to preliminary estimates from Cox Automotive.

Price increases by power train.

Prices of used EVs jumped by 2.1% in January from December, and by 11.7% since the low point in June, seasonally adjusted, to an index price of $27,086. EV prices are still 74% higher than in December 2019, after the horrendous 127% spike during the pandemic (red in the chart below).

Prices of used vehicles with internal combustion engines (ICE) rose by 0.4% in January from December, and by 4.5% from the low point in June, to $18,602. Prices are 32% higher than in December 2019 (blue).

EVs are still a small but rapidly growing segment of what’s going through auctions, supplied mostly by rental fleets and lease returns. And it’s not just Teslas anymore, but numerous different models by other automakers.

In California, the largest auto market and EV market in the US, sales of new EVs rose to a record share of 22% of total new vehicle sales in 2024. In Q4, sales of new non-Tesla EVs surpassed Tesla sales for the first time. This is the feedstock for supplying the used-vehicle market, and it has been building momentum for years.

Used-vehicle wholesale prices had exploded by 65% in 2020-2021, according to Manheim, a unit of Cox Automotive. Retail prices had spiked by 55%, according to CPI data. This historic spike had been a substantial contributor to inflation over this period. Then prices plunged in 2022 through 2023, surrendering about half of the wholesale price spike and about a third of the retail price spike, thereby contributing to the sharp deflation in durable goods that helped decelerate overall inflation. But those used-vehicle price declines stopped in 2024 and reversed course.

The inventory issue.

Retail inventories are tight amid supply issues and solid demand. The inventory at the end of December at used-vehicle dealers was at about 2.2 million units, down by about 5% from the already low levels a year ago, and down by 25% from December 2019.

But in January, sales jumped 15% year over year, and supply fell during the month, according to preliminary estimates from Cox Automotive.

New influx into the used vehicle market comes from vehicles that had been purchased new some time ago. They enter the used market via trade-ins, lease returns, fleet turnover such as at rental operations (2.5 to 3.5 million vehicles in a normal year), etc.

The problem now is that during the period of the semiconductor shortages in 2021 and 2022, global vehicle production plunged. In the US, 6 to 10 million fewer new-vehicles were sold over the two-year period than might have been otherwise, and these 6-10 million vehicles are now missing from the national fleet, and they’re now not entering the supply pipeline of used vehicles.

In addition, leasing activity in 2021 and 2022 plunged, and so the number of leases that are now maturing isa way down, and so supply from leasing companies, when they sell the two and three-year-old off-lease vehicles at auctions, has plunged. This will drag into 2026. And if demand remains solid amid this tight inventory, prices will feel the heat.

Retail prices U-turned.

Retail prices, as measured by the CPI for used vehicles, lag these whole sale prices by a couple of months, and hit their low point in August (auction prices hit the low point in June).

The used vehicle CPI jumped by 1.2% in December from November, seasonally adjusted, the fourth month-to-month increase in a row. From the low point in August through December, the index has jumped by 6.4%, a substantial increase (red).

The CPI for January will be released on February 12 and will be captured in our series, Beneath the Skin of CPI Inflation.

We pay a lot of attention to this because the 20% plunge of used vehicle retail prices from early 2022 through August 2024 was a powerful factor in the cooling of CPI inflation. But that trend has U-turned.

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