At a 3% 12-month rate, the CPI pleasantly surprised us this month.
But still, if you remain worried about inflation, do take a look at used car prices.
Used Car Prices
During 2021, used car prices soared. Soon after, so too did inflation.
On the supply side, fewer used cars were available because shrinking new car sales reduced used car trade-ins. Somewhat similarly, rental car fleets were selling fewer cars to used car dealers because the Covid contraction created less need to refresh their auto inventories. With fewer used cars, our supply curve shifted upward, and prices rose.
Then, on the demand side, new car prices were up because pandemic related factory shutdowns and a chip shortage resulted in fewer new cars. Since fewer new cars elevate their prices, buyers instead demand used cars.
As a result, because of massive changes in supply and demand, pre-owned car prices were up approximately 14 percent. For many reasons but including pre-owned cars, the 2022 inflation rate was a whopping 8%:
But then, during 2022, we had a reversal. And now, for June 2023, used car and truck prices are down 5.2%. Correspondingly, we had the 12-month 3% inflation rate surprise:
Our Bottom Line: Core Inflation
In a CPI inflation hierarchy, we can move from inflation, to core inflation, to the super core. As we travel from one category to the next, statisticians eliminate the items that create price volatility. Because their volatility has little to do with inflation, we wind up with numbers that more accurately illustrate inflation.
In the July CPI, year-over-year core inflation was 4.8%. As a core that eliminated food and energy. the drop in used car prices had a greater impact:
At this point, we can add the super core number that strips away housing from core. Then we wind up with a super core number that eliminates food, energy, and housing because they could obscure, through their volatile fluctuation, our real inflation rate. Confusing us further, Nobel laureate Paul Krugman tells us that we need to know super core for the accurate inflation picture.
So, where are we? Although it’s tough to measure inflation, used car price trends can be helpful. And the used car price trend is down.
My sources and more: My Bloomberg Opinion email (gated unless you subscribe to the free email) returned my inflation thinking to used cars. For more car facts and analysis, the BLS, Yahoo!Finance, and the NY Times also focused on prices as did our March 2021 post. Meanwhile, the San Francisco Fed had the perfect explanation of core inflation