Inflation Fears Driving Used Car Prices Back Up

It’s hard to keep up with used car prices. They rose during the pandemic due to supply chain
issues and low new car inventories and then started to drop when manufacturers increased
production again. Dealerships could stock up their lots with shiny new cars again and used car
dealers could keep some of their inventory. But now what’s happening? Are they still dropping,
or are inflation fears driving up the prices once again?

The Ups and Downs of Used Car Prices

The used car market debacle was one of the biggest indicators of an unstable economy during
the pandemic. Congress gave out stimulus money to keep people spending, at the same time
that supply chain shortages kept auto manufacturers from producing new cars for consumers
to buy, increasing the demand for used cars and driving the prices up. By the time summer
2022 rolled around, the used car market started to normalize, but then when fall rolled around,
rising interest rates designed to slow down the economy popped the used car bubble again.
Now, used car prices are heading back up. Before the pandemic, used car prices were about
33% lower than they are right now, and the prices are continuing to rise. Again.

But Aren’t Wages Up?

Wages are up significantly. People are making about 16% more than they were before the
pandemic, but prices are up too. Home prices are up about 43%, which is almost triple the
increase in wages, and cars are up about 33%. This means that the increase in wages doesn’t
cover the cost of living, including the prices of used cars.

It doesn’t end there. The rapidly rising interest rates are making it more expensive to borrow
money to pay for the more expensive large ticket items. It will now cost consumers 5-6% to
borrow money for a car and about 7% to borrow money for a home. Add on the astronomical
cost of groceries, and you have the perfect storm.

The Relationship Between Used Car Prices and Inflation

The initial drop in used car prices has been a big factor in slowing inflation, but with prices rising
again, it could make it hard for the Federal Government to slow down its interest rate hikes.
The economic conditions will continue to have an effect not only on the price of used cars but
the supply and demand too. This makes it difficult to predict future prices. Economists don’t
think the recent increase in used car prices is just a blip, but there are some hopes that the
prices could come down. Spring is a big time for used car sales because people get their tax
returns and have money in their pockets to put toward a used car.

So What’s Happening Now

Another consideration in the used car market and its connection to inflation is consumers will
seek out older used cars to save money. The combination of high prices and high interest rates
is making it difficult to afford a car, reducing demand so buyers will once again head to used car
dealers. While lower demand usually leads to lower prices, it doesn’t seem to be the case this
year.