Used car prices grab Wall Street’s attention as a predictor of inflation

The hottest ride on Wall Street right now is the humble used car.

The cost of dealer clunkers and trades has suddenly become market-moving news, with analysts, economists and traders focusing on an obscure indicator called the Manheim Used Vehicle Value Index.

“I’ve never spent so much time watching it,” said Robert Rosener, senior US economist at Morgan Stanley. “I also don’t think I’ve spent so much time talking about used car prices in my life.”

The Manheim Index provides a monthly update of the prices of used cars sold at wholesale auctions. And while the used car market is booming in part due to a shortage of chips for new vehicles, the index offers crucial information to investors trying to answer an important question: what’s going on? it with inflation?

Over the past year, consumer prices have increased by more than 5%, the fastest pace in more than a decade. It’s an important consideration for virtually everyone on Wall Street. High inflation is a major threat to bond investors because over time it erodes the real return on the regular interest payments they receive. Inflation is also important to stock investors because historically it has prompted the Federal Reserve to raise rates, which can cause stocks to fall.

The Fed has repeatedly said the recent price hike was “transient”, due to unusual shortages weighing on the economy due to the pandemic. And right now, one of the main reasons for the increase in the Consumer Price Index – a key benchmark for inflation in the United States – is the shortage of automobiles.

“People had a preference for private rather than public transportation during the pandemic,” said Phoebe White, analyst at JP Morgan covering the bond market. “There was a kind of exodus from the cities. There was therefore no longer a need for cars.

But the production of new cars was limited. Factories nearly shut down last year to prevent autoworkers, who carry out their tasks up close, from contracting the coronavirus. And the limited supply of computer chips, following similar shutdowns of electronics factories, has kept automakers from returning to normal production this year.

Buyers therefore flocked to the second-hand market, catapulting prices. In June, prices for used cars and trucks rose 45% from the previous year, according to the Bureau of Labor Statistics, which produces the Consumer Price Index. That pace has slowed somewhat since then, but in August, prices for used cars and trucks were still up almost 32% from the previous year.

Used car prices aren’t usually a big factor in inflation, but the big leap has changed that. Analysts knew that if they could somehow predict where used car prices would be in a few months, that would give them a good idea of ​​inflation.

“This one component, which contributed so much to headline inflation in the first half of the year, how far and how quickly will it decline?” said Brett Ryan, an economist at Deutsche Bank, which now closely monitors used car prices on a monthly basis. “Manheim is your best guide. “

Manheim, named after the Pennsylvania city where the company started, has long been a division of Cox Enterprises, a private conglomerate based in Atlanta. It operates around 80 wholesale auction sites across the country, where dealers, rental companies, and companies that manage large fleets of vehicles come together to buy and sell more than five million cars each year.

The data for each of these sales is distilled into an average, with a few adjustments made to smooth out any idiosyncrasies in the mix of cars sold in any given month. (Otherwise, cars unloaded by a Mercedes-Benz dealership, for example, or a large rental company could skew the number.)

The attribute of the Manheim Index that analysts love is that it captures the wholesale prices paid by resellers, which typically determine what consumers are charged a few months later. This makes Manheim a leading indicator of consumer prices, typically offering a jump of two or three months from the numbers in the consumer price index.

For example, wholesale prices, as measured by Manheim, jumped 8.3% in April. (They were up 54 percent from the previous year.) Two months later, in June, used car prices, as measured by the Consumer Price Index, jumped 10.5 percent from the previous month.

But Manheim’s prices started to rise more slowly and then fell. In June, they fell 1.3%. Like clockwork, consumer prices fell 1.5% two months later. Manheim’s prices continued to fall, suggesting that further declines will continue to occur for consumers.

The index has been published since 1997, but it has never received as much attention as this year, said Jonathan Smoke, chief economist at Cox Automotive, the unit that holds the auctions.

I have had my own share of fellow economists from other sectors constantly contacting me and asking me for information on the performance of the Manheim Index, ”said Mr Smoke. “So I’m certainly seeing more interest from more people than we traditionally have.

While the Wall Street craze for used car prices is new, it’s only fitting that financial events cause analysts to scramble to examine data that many have probably never heard of before.

During the financial crisis of 2007 and 2008, all eyes suddenly turned to a series of so-called ABX indices, which tracked the price of insurance in the event of default on subprime mortgage pools. These indices plunged when investors suddenly realized that a gigantic chunk of these could not be repaid.

When the European debt crisis began in 2010, researchers focused on a once-obscure set of figures produced by the European Central Bank, known as Target 2 data. These figures tracked loan and debt balances. between European central banks and provided an abbreviated means of gauging the amount of money leaking from the banking systems of heavily indebted countries like Greece.

Likewise, when the pandemic began, financial researchers suddenly became familiar with the parameters that allowed them to keep pace with the spread of the virus, often known as the R-number, as they assessed the prospects for disruption. economic.

Even with the Manheim Index pointing to a slowdown in inflation, there is still reason to believe that car prices could remain high over the next few months. According to Carfax, flooding from Hurricane Ida damaged approximately 200,000 cars from Louisiana to New York. This could make the used car supply even tighter while pushing new buyers into the market.

And the chip shortage continues to stumble production plans: Toyota, Ford Motor and General Motors have all announced plant closures or production cuts over the past month.

But in the longer term, the key question economists are now asking about car prices is how much they could drop – and reverse the direction in which they are pushing inflation.

“Next year, if we see used car prices reversing completely, we are going to talk about a disproportionate downward influence that used car prices could have,” Mr. Rosener said of Morgan Stanley. “This is where you are going to have continued data importance like Manheim.”

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