This Is What Inflation Would Look Like Without Used Cars and Trucks

Inflation continues to dominate the conversation after last week’s red-hot CPI number. Of course, the question remains: How much of the index-level gains that we saw were one-off price increases related to the economic reopening, as opposed to broader, problematic pricing pressures enveloping the economy?

My colleague Matt Boesler made this chart, which shows core inflation vs. core inflation excluding used cars and trucks.

This Is What Inflation Would Look Like Without Used Cars and Trucks

As you can see, the main inflation number (the gold line) shot up to the moon last month. Whereas if you just exclude the used cars and trucks category, then the number is right in-line with normal pre-crisis levels. Nothing special.

Of course, there’s always the danger of slicing and dicing data too much to wind up with any outcome you want. So you have to be careful. However, there’s good reason to think this surge is specifically related to transitory/reopening factors. Specifically, as my colleague David Welch noted, much of the price increase was driven by car-rental companies being forced to buy used vehicles on the open market, which is related to the reopening. It may also be a function of those same rental-car companies having liquidated much of their stock a year ago, and now scrambling to reverse that decision.

One interesting thing is that while the prices of used cars shot up, new cars (where we see production constraints) didn’t see as much volatility.

Earlier this year, I did an interview with Nathan Tankus about why shortages don’t always lead to higher prices, and he anticipated this phenomenon, saying:

I think, generally, a good place to look is whether more of the product can be produced easily. By definition you can't increase the production of used cars. (Nonetheless, price increases might get big enough to get people to sell a used car they wouldn't otherwise sell). Antiques are a very obvious example here.

In other words, higher prices on new cars don’t serve much purpose, because the automakers are already maxing out production. Whereas with used cars, higher prices induce a supply response by bringing more cars to market. 

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