Prices are rising again, amid tight supply, sharply reduced flow through the used-vehicle pipeline, and strong demand.
By Wolf Richter for WOLF STREET.
Prices of used vehicle sold at auctions across the US jumped by 1.3% in November from October, seasonally adjusted, continuing an upward trend that started over the summer, according to the Manheim Used Vehicle Value Index, which is adjusted for changes in mix and mileage (red in the chart).
This jump flipped the year-over-year reading to the first increase (+0.2%) since August 2022, after the historic plunge during which prices gave up nearly 50% of the pandemic spike, with a bottom in mid-2024. Now prices have turned around.
This has implications for inflation because the historic plunge of used vehicle prices was a significant contributor to cooling core inflation measures. Now used vehicles have turned into an inflation headwind.
Not seasonally adjusted, wholesale prices were roughly unchanged in November from October, which whittled down their year-over-year decline to 1.0%, from the double digits earlier in 2024, and the smallest year-over-year decline since August 2022 (blue in the chart above). Wholesale prices normally decline in November, as volume slows during the Thanksgiving week.
Dealers buy at these auctions to replenish their used-vehicle inventories. Supply comes from rental fleets that sell some of the vehicles they pull out of service, from finance companies that sell their off-lease vehicles and repos, from corporate and government fleets, other dealers, etc.
The Three-Year-Old index declined 0.9% in November, but that was less than the five-year average decline between 2014 and 2019 of 1.2%, “indicating depreciation trends were less than typical, especially earlier in the month,” said Manheim, a unit of Cox Automotive. Manheim runs about 8 million vehicles a year through its auctions.
The average daily sales conversion of 55.6% “was much higher than we normally see at this time of year,” Manheim said. Over the past three years, the daily sales conversion rate averaged 50.7% in November.
The used-vehicle pipeline is messed up, and will be for years.
Leasing activity plunged in 2021 and 2022, amid new-vehicle shortages and uncertainties about lease-end residual values due to the insane spike of used vehicle prices at the time.
As a result, the number of leases that matured in November was down by 36% from November 2023, according to J.D. Power. This plunge in lease maturities translates into a plunge in supply of two-year-old and three-year-old vehicles to the used-vehicle market. And it will drag into 2025 and 2026.
A fundamental issue for used-vehicle supply in 2024 through 2026 is that new-vehicle production and sales plunged from 2021 through 2023 due to the semiconductor shortages, and sales plunged, and then were slow in coming back up, and are still well below 2019 levels. Compared to 2019 sales levels, between 2020 and 2024, 10 million fewer new vehicles were sold.
On a narrower scale, over the seven quarters from Q2 2021 through Q1 2023 when the chip shortages hit vehicle production and sales, automakers sold 6 million fewer new vehicles than over the seven-quarter period before the pandemic.
These 6 to 10 million new vehicles that didn’t get built and weren’t sold would have entered the used-vehicle market over the years, but now they’re missing and will not be able to supply the used vehicle market over the years.
Retail inventories are tight have been zigzagging lower all year. At the start of November, inventory at used-vehicle dealers was about 2.17 million units, down by about 26% from November 2019, according to data from Cox Automotive.
Used vehicle retail sales have jumped by the double-digits year-over-year over the past few months amid strong demand – much lower prices are doing the trick. In November, used vehicle sales increased by 15% year over year, according to preliminary estimates by Cox Automotive, after a 12% year-over-year increase in October.
Powerful inflation tailwind turned into headwind.
Retail prices are starting to show the effects of these dynamics. From the beginning of 2022 through the summer of 2024, the CPI for used vehicle plunged by 28%, giving up half of the ridiculous 76% spike of the prior two years.
These lower retail prices have re-ignited sales volume. But inventories are tight, hampered by the much-reduced influx of vehicles into the used-vehicle market due to much lower sales of new vehicles in 2020-2023.
So wholesale prices have ticked higher in recent months, after the historic plunge, as dealers replenish their inventories to meet demand. And retail prices, which lag wholesale prices by a couple of months, also started rising again.
The used vehicle CPI already flipped, and spiked by 2.7% in October from September (+38% annualized), seasonally adjusted. Not seasonally adjusted, the index also rose, though October is usually one of the weaker months of the year.
The 2.7% jump in October came after three months in a row where prices formed a bottom and halted the long plunge. And it reduced the year-over-year decline to 3.4% from double-digit year-over-year drops over the summer.
The CPI for November will be released on December 10, and we’ll see the next installment of this story.
The 28% plunge of the used vehicle CPI since early 2022 was a powerful contributor to the cooling of core CPI over the same period. But that ended over the summer, and the mere fact that it stopped plunging contributed to the end of the cooling process of CPI.
And now the used vehicle CPI has turned into an inflation headwind, contributing to the current re-heating of the inflation measures, particularly the core CPI and the core PCE price index.
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