Friday, December 10, 2010
The ongoing rise in used car prices—with temporary setbacks due to the trauma of recessions—is remarkable, especially since so many seem to assume that the high level of unemployment and the tremendous amount of "resource slack" in the economy (GDP is running about 10% below its full-employment trend level, by my calculations) make inflation practically impossible and deflation something to worry about.
I remain convinced that inflation is a monetary phenomenon and has nothing to do with resource slack or the level of unemployment. What few prices there are that are declining—mostly housing-related—are simply proof that the economy is still in the process of shifting resources from one sector (e.g., construction and housing-related areas, where there was obvious over-building) to another (e.g., mining, which is booming these days because the global economy is expanding rapidly and monetary policies are accommodative). That shift is signaled and driven by a comparable shift in relative prices. Housing prices decline, commodity prices rise; people leave the construction sector and move to the mining sector as a result. If car prices keep rising like this, pretty soon it will be obvious that there is a shortage of new cars being produced; look for more robust gains in new car sales and production in the months and years ahead.
For more color on the used car picture, I recommend reading Mark Perry's post.
Posted by Scott Grannis at 2:58 PM