The automotive sector is for many economists and central banks one of the best references to anticipate the evolution of the economy and inflation. Car buying responds almost in real time to whether there is an increase in income and savings. In addition, the second-hand market offers a lot of flexibility to adjust in price to the economic context. While in the US the value of used cars is skyrocketing by more than 20%, in Europe the price of new vehicles does not stop falling and the price of new vehicles is growing. This behavior can be explained and leads to the same conclusion: inflation is reaching the real economy, but the question remains as to whether it will be temporary or will have long-lasting effects.

The canaries in the mines have served for centuries as the rudimentary alarm that something is wrong. If the bird fell, it was a clear sign that there were toxic gases in the tunnels. And at present, some products, due to their characteristics, have the same function for inflation. Cars are the perfect canary for economists. For years it has been a key indicator for consumption and to detect if there is an excess demand that translates into inflationary pressures.

Buying a car is dismissed as a quick consumer drive. It requires a certain capacity to save or borrow, so it is considered a thoughtful purchase. One of the best meters of consumption and prices. But it is currently offering puzzling data.

On USAFor example, the evolution of car prices has been one of the key components that has caused inflation in April to be at 4.2% annual rate, the highest level since 2008. Practically, the The 21% increase in the price of second-hand cars explains a third of the rise in inflation. Since 1953, such an aggressive price movement has never been seen. And it contrasts with the 11% rise in the price of new cars.

The inflation data unleashed a certain panic, especially in the markets. There is fear that the stimuli deployed by Biden will release inflationary pressures without control. But the truth is that the second-hand car market in the US really lives in exceptional circumstances. The pandemic has caused an outright rejection of public transport. Americans have thrown themselves into the arms of the private vehicle, as the new car market has production problems due to a shortage of processors and tensions in supply chains.

“People need to get back to work, but giving up public transport has boosted the demand for used cars and prices have skyrocketed, but it won’t hesitate forever,” says Ian Shepherdson, chief economist at Pantheon Macroeconomics to explain the incidence. of the pandemic. And to this circumstance is added the money in the pockets thanks to the checks from the Biden Administration.

There are two details that explain the dynamics that the US is going through. On the one hand, direct income to citizens has caused supply problems. Dealers have run out of used cars. Car repossessions have fallen sharply, explains Carey Cherner, owner of a used car dealership in Kensington, Maryland, to Financial Times. The wholesale auctions from which many establishments are fed have run out of cars and the lots that have been awarded have been at a gold price.

Bloomberg offered another explanation. Much of the price increase was due to car rental companies they were forced to buy used vehicles, after selling a good part of their fleet during the months of confinement.

A perfect storm that has not prevented the prices of used cars from entering the political and media debate in the country. “We are seeing a level of stimulus that is essentially unprecedented in the last 50 years and it is really uncharted waters,” explains Nathan Sheets, chief economist at PGIM Fixed Income and former US Under Secretary of the Treasury. The economist went so far as to affirm that he is 80% sure that inflation will skyrocket, after the CPI data.

“There will be temporary spikes in prices other than food and energy,” warns Krugman

Nobel laureate Paul Krugman has argued that “April prices were largely driven by peculiar factors obviously related to the reactivation of the economy.” The famous economist has long warned that the economic recovery is going to “be very strange,” with “an unusual series of bottlenecks that will cause many temporary spikes in prices other than food and energy.”

His thesis is the one held by many members of the Fed, and other central banks such as the ECB, that inflationary pressures are temporary. The debate is so heated that even Lael Brainard, a member of the Fed government, jumped into a speech this week. “The pressures on used vehicle costs may persist through the summer months, I expect it to fade and probably recede somewhat in subsequent quarters,” he said.

And what about Europe?

The car market in Europe is affected by similar factors, such as the effect of the pandemic and the reopening of the economy, but paradoxically the price that rises sharply is that of new cars, despite suffering a similar shortage of semiconductors.

The price of used cars in Spain falls by more than 7%, while in new cars they rise in an annual rate to 3%. The manufacturers’ problem is very similar to the US. According to the Spanish Association of Automotive Suppliers (Sernauto), automobile factories located in Spanish territory stopped producing 231,679 vehicles between January and May of this year. The policy of renewal of the car fleet in Europe with strong incentives to buy new cars compensates for the problems that may be caused. Something that is added to “the changes foreseen in taxation, the actions aimed at modifying mobility habits and the restrictions imposed by emission regulations”, stand out from BBVA Research, which end up affecting the second-hand market more.

For the coming quarters, BBVA Research expects a rebound in car sales. The absorption of part of the savings accumulated during the health crisis, the reduction in uncertainty and the expected increase in per capita income will boost the demand for passenger cars. Registrations could grow 8% in 2021 to around 920,000 units and 24% in 2022 to exceed 1,140,000 units.

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