Tax refunds make great down-payments which are great for higher prices. Every year, the industry salivates over tax refund season. But this year will be special.
By Wolf Richter for WOLF STREET.
Prices of used vehicles sold at auctions where franchised and independent dealers replenish their inventories jumped by 2.4% in January from December, adjusted for mix, mileage, and seasonality (red in the chart), amid tight supply and “strengthening demand” despite the harsh winter weather in a big part of the country.
Unadjusted prices jumped by 2.7%, much more than the normal price increase in January (blue), which over the long term averaged 0.4%, according to today’s Manheim Used Vehicle Value Index (MUVVI). Manheim, a division of Cox Automotive, is the largest auto auction house in the US.
The 2022 through mid-2024 plunge in used vehicle prices – after the horrendous spike in 2020 and 2021 – contributed substantially to the cooling of inflation. Now there’s new energy being infused into prices: “The spring bounce for wholesale markets looks like it started early this year, and stronger tax refunds and lower used supply may keep it running for longer than typically seen,” Manheim said in the report.
The Manheim Market Report (MMR) index for three-year old vehicles jumped by 1.5% in January from December, “more than is typical for this period,” Manheim said.
Sales conversion at the auctions, at 60.7% in January, was 3.2 percentage points higher than the average over the past three years, and 6.5 percentage points higher than in December, indicating “strengthening demand, as the metric remains above usual levels for this time of year,” Manheim said.
Year-over-year, unadjusted prices were up by 2.5% in January, after being nearly flat for the prior three months (0.2%, 0%, 0.7% year-over-year).
This tax refund season will be special.
The One Big Beautiful Bill (OBBB) included seven tax credits, deductions, and exclusions – new or increased – that will lower the tax bill for individuals for the tax year 2025 by $129 billion, according to estimates by the Tax Foundation.
But the IRS did not adjust its withholding tables for 2025, and so the refunds, to be paid out during tax refund season in 2026, will be larger than normal. Republicans have recently stated that this was planned so that consumers would get this cash and feel good and spend it, and that it would boost the economy just before the mid-term elections and thereby boost support for Republicans.
And consumers will largely spend their tax refunds. Tax refunds make great down-payments for used vehicle purchases, and big down-payments are great for higher prices. Every year, the industry salivates over tax refund season. But this year will be special.
Manheim is seeing this already:
“We had planned for a stronger January from a pricing perspective, but wholesale values moved even faster than we expected on the back of strong retail demand, driving the MUVVI to its highest reading since September 2023.
“With tax refund season officially starting last week, we are expecting that more consumers will be getting refunds – and that the size of those refunds will hit a new record. Those factors should help consumers punch the ticket on some big-ticket purchases, even as we have seen a more muted impact on market interest rates in the face of three Fed cuts since September.”
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, from other dealers, etc.
But wholesale supply is tight, at 26.6 days’ supply at the end of January, compared to 32 days on average for the end of January in the years before the pandemic.
These auction prices form the costs for dealers. And those higher costs then flow into retail prices if consumers go for those higher prices — and this time they will, armed with big tax refunds.
Prices of EVs versus ICE vehicles.
Prices of used EVs rose by 0.4% in January from December from already very high levels, to $27,298 (red).
Prices of ICE vehicles jumped by 2.2% for the month to $19,105 (blue).
Retail prices for used vehicles in January will be reflected in the CPI for used vehicles, to be released maybe next week by the Bureau of Labor Statistics. For December, the CPI for used vehicles declined from November by 1.1% seasonally adjusted (red) and by 1.6% not seasonally adjusted (blue).
Since the used vehicle CPI reacts with a lag to wholesale prices, the impact of the jump in wholesale prices in January, and going forward through tax refund season, will start showing up in the CPI in a month or two.
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Howdy Youngins. Never let Uncle Sam or anyone else owe you $$$. If you do get a Govern ment refund, save it or pay off debt…..
That advise will fall on deaf ears 🤣
It’s baffling how people don’t get (or maybe don’t care) that they’re giving an interest free loan to the government instead of having that money in their pocket.
I think it’s good advice for people who have struggle with overspending. I find much easier to plan on receiving money than having to give it up. Imagine having spent the money that you owed. How is that better?
Getting a little back is probably ideal for most people.
On a less (more?) serious note, if people can be conditioned for President’s Day Mattress sale, I suppose they can be conditioned to buy a car with their refunds.
It’s been 5 straight years of inflation above the “FED’s target.” They even started cutting rates before they hit it. When will they finally admit it’s intentional? INFLATION STOKING/ENTRENCHMENT OPERATION.
It’s likely they are quite pleased having inflation under 3%. Low enough to pretend they are trying to reach 2%, but high enough to help with the national debt.
There’s a fine line between appreciation and inflation. But I do agree that at some point it goes on long enough to be intentional.
Part of me thinks that its normal price discovery after years of cheap goods and services. Nonetheless if Warsh stays the course rather than flip flopping, you may finally get your wish of QE abolishment.
My crystal ball (NFA) tells me a lot of that refund cash is going to be lain at the feet of my alpha goddess ULTA beauty … we shall see!
Who benefits from spikes in used car prices? I agree inflation is coming I’m seeing it in wages anecdotally and it hits there first seems to me 🤔