Used car prices could indicate what’s next for inflation

According to Wall Street experts, the decline in used car prices could signify that inflation is easing. That’s good news, especially after another interest rate increase from the Federal Reserve, which was approved last week.

The Manheim Used Car Price Index was at 210.8 in August but fell to 205.9 in September. The index has declined nearly 13% this year so far. According to the consumer price index, used car and truck prices fell 0.1% from the previous month, as the Bureau of Labor Statistics reported.

Used car sales are often seen as a measuring stick for the rest of the economy, as many factors are tied to their performance, such as gas prices, consumer confidence, supply chain issues, and interest rates.

Inflation has hit a 40-year high, and according to analysts at Deutsche Bank, used car prices have risen at a similar rate. 2020 and 2021 saw prices increase 20% each year.

“For the ten years ending 2019, (pre-pandemic), used car prices appreciated at a 2% annual rate – consistent with overall inflation,” said Kevin Barry, Chief Investment Officer of Summit Financial in Parsippany, New Jersey. “For the two years ending 2021, the pace of increase was 10X the previous ten years,” the note from Barry read.

In an effort to slow the pace of inflation, the Fed has signaled plans to increase the rates to a terminal rate of 4.6% in 2023. This means another rate increase is likely in the future.

Even with the used vehicle value index trending in the right direction, Barry said there’s more work to be done before the Fed is confident that inflation is back in check. A drop of about 20% would bring the annual price increase trend to around 5%, which could be enough for the Fed to ease their interest rate hikes. It would need to drop by 25% to reach pre-pandemic levels of the 2% annual price increase.

“I believe that the Fed will increase interest rates until the index drops to 162, from 205 today,” he said.

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