Consumers who want to spend their tax refunds on a car may be disappointed this spring: Prices are rising.
Signals from the used car market are flashing higher prices ahead, reversing a decline that started last fall.
Manheim, which auctions used cars to dealers, reported a 4.3% increase in vehicle prices in February, the largest increase for that month since 2009. Another tracker of wholesale used-car prices, Black Book, said prices rose 0.46% for the week ended March 11, the largest single-week increase since November 2021.
Because prices in the used-car wholesale market typically change about four to eight weeks before they trickle down to car buyers, Americans should expect retail prices to start rising this month.
“Inflation’s out there,” said Pat Ryan, CEO of the car shopping app CoPilot.
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He noted that the sticker prices are not only important for shoppers, but also the Federal Reserve, which has been trying to curb soaring prices for the past year with aggressive rate hikes that make borrowing costs higher for consumers and businesses.
Over that period, the Fed has raised its short-term benchmark fed funds rate to a range of 4.50% to 4.75% from nearly zero to tackle the highest inflation in 40 years.
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But why did used car inflation decline in the consumer price index?
While the most recent consumer price index (CPI) showed used vehicle prices fell 2.8% in February from the prior month and 13.6% over the last 12, that data wouldn’t have captured the higher wholesale prices car dealers began to pay in February.
Cars that Americans purchased that month were likely bought by dealers in December and January when wholesale prices were lower, Ryan said.
March and April, however, will be a different story. Those vehicles will reflect the higher prices dealers have faced since February, Ryan said.
In the last four weeks, CoPilot data show the average used-car price has risen by $700 and now tops $40,000.
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Why are used car prices rising again?
January and February, typically slow sales months, showed unusual strength this year. In December, used-vehicle retail sales rose 5% from a year earlier, and 16% between December to January, Manheim said.
Those sales may have received a boost from a generally mild winter, lower inventory levels of vehicles, a dip from peak pandemic prices and possible efforts by shoppers to buy models before interest rates rose again, experts say.
Also, because of economic turmoil and the possibility of recession, “people are conscious of their budget, and a used car payment may be less than a new car payment,” said Mike Trudeau, executive vice president of business development at car shipper Montway Auto Transport.
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How will this affect inflation?
Used cars are one of CPI’s larger components at 4.5% of the core rate, which excludes changes in food and energy prices, and they are a large reason why inflation has cooled. The core rate, which the Fed carefully monitors as a better inflation indicator since it removes volatile costs, has been accelerating again. It rose 0.5% in February, compared with 0.3% in November and 0.4% in December and January.
Ryan thinks the odds are even that shoppers will keep buying used cars even at higher prices.
But history shows that shoppers generally buy cars throughout the spring.
“With tax returns coming in, they can keep buying cars,” Trudeau said. “I see no reason why they couldn’t continue through March and April.”
Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at [email protected] and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.