Friday, December 10, 2010

Used car prices continue to rise


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.

13 comments:

Benjamin said...

Used car prices?

Well, I would like to know about the index. Is the mix of cars consistent?

What if a lot of distressed homeowners are unloading two-year-old Mercedes? Does that pull up the index?

Also, cars are way better than 10-20 years ago.

A car today goes to 200k miles easy, and more if you baby it. Egads, they have electronic gadgetry in them I don't have in my home yet. Seats with heaters, and GPS location finders, and stereo i-pad whamo-wizzos. Back-up cameras.

A rising price of used cars could reflect better quality.

The Cleveland Fed seems to think we are posting a median CPI in the 0.5 percent range. The CPI core rate has been dropping for two years. Unit labor costs are going down at nearly a 2 percent annual rate, and all types of commercial real estate are very soft. How do you get inflation in that picture?

Deflation maybe, ala Japan.

The Nipponistas represent the most dangerous element in America today--ironically, a greater threat to our retirement portfolios than any other group in the world.

The Taliban can be laughed at, but the Nipponistas could cut your equity and property values by 75 percent over 20 years.

Now that, I am afraid of.

Benjamin said...

BTW-

I looked at the Manheim page. Used car prices are going up. Up nearly 6 percent in last year, although such prices were depressed.

But also note the index was at 117.5 in Feb. 2001 and is now at 124.4--in other words, it has risen 5.7 percent in nine years. Inflation?

And we don't know if quality has improved in that time period.

Hardware in the private sector just gets better and cheaper all the time.

Public Library said...

If you print enough money eventually a used car will become more expensive then its original purchase price...

Scott Grannis said...

Public: Having lived in Argentina for 4 years with inflation averaging 125% a year, I can personally attest to that fact.

sgt.red.blue.red said...

1.4 percent compound growth rate for just shy of sixteen years.

Be interesting to see same comparison on new car prices.

b said...

I think it's a good thing used cars are getting expensive. Most of the time, people would be getting a better deal with a new car (these days, they're not expensive, come with a warranty, guaranteed not to have surprises).

Public Library said...

I think an interesting takeaway is the distortion in prices. Government subsidizing the new car market and printing dollars, now we have skyrocketing used car prices among other things.

Classic stuff...

Benjamin said...

Public Library-

Look at the index. Used car prices have "skyrocketed" by 5.7 percent in nine years.

And we do not know if Manheim controls for quality and mix.

I suspect used cars, quality adjusted, are lower in price than nine years ago.

Inflation-schmaflation.

honestcreditguy said...

Used car prices are where dealers make money. Not so on new cars, thus the used car market is like wall street. Dealers make the money off the minions...Wholesale costs of used cars is rising do to the condition of many used cars from low mileage lease returns and also from the dealer competition to get them....Public is still broke and credit score destruction is still in play..Subprime lending return is also driving used car values higher...

I wouldnt read to much into this report..Abs paper buyer....

Paul said...

Scott,

Do you agree with the notion that a significant reason for the used car price jump is the shortage of used cars due to Obama's idiotic Cash for Clunkers program?

septizoniom said...

this is pap journalism. you really should re evaluate your blog posts come the new year. focus exclusively on the macro date of real importance and your good eye/ear towards government induced theft of money weath through inflation.

Scott Grannis said...

Paul: Cash for Clunkers was a really bad idea, but I don't think it has contributed significantly to increase used car prices as measured by Manheim. I may be wrong, but Manheim is using data gleaned from dealer purchases of used cars at auction. I don't think "clunkers" play a big role in this process.

dh said...

Interesting information. I haven't seen this index before + your perspective is not common + makes good sense. Thanks very much for your dedication to the blog, I'm an occasional reader - getting more frequent!

Thanks,
Darren