Used car prices are falling and are set to fall sharply year-over-year.
While used cars are a relatively small weight in calculating overall CPI, they contributed well over their weight in inflation over the last 18 months.
However, and a big HOWEVER is that used cars are now turning to outright deflation.
We just received the September data and we just witnessed the first year-over-year decline since the dark days of COVID.
We use the Manheim Index which came in at 204.5. If we use 204.5 for the next 3 months, the year-over-year declines in used cars accelerate to levels last seen in April 2020 and the financial crisis Oct-Nov-Dec of 2008. (Shown in the image above)
What does this mean.
For one it is outright deflation. However if we use the 4% weight of used cars within CPI and the December year-over-year estimate, used cars will be a -.54% detractor to overall inflation.
Another note is that this calculation is using September's pricing all the way through year-end. However, we know that used car prices have declined 6 of the last 7 months on a month-to-month basis. So these figures can be seen as very conservative. If we use the year-to-date trend, we could see used cars detracting up to .8%.
This is a big deal as other areas are rolling over. Also, the used car market has implications for the new car market which makes up another 4%.
That is for another conversation.
Lastly, we also know that these pricing moves generally lag inside of the CPI report. So while we already see negative figures inside of CPI from used cars, the negative figures will show up more sharply in months/quarters ahead.
Disclaimer: This is not a recommendation to purchase or sell any securities mentioned. This is not investment advice and is for educational purposes only.