This week in Bidenomics: The used-car blues

·Senior Columnist
·4-min read

President Biden has an inflation problem. The annual pace of price hikes hit 4.2% in April, the biggest jump in 12 years. Stocks sold off and consumer confidence fell, as the robust economic recovery suddenly turned pallid.

As inflation goes, however, there’s a very strange divergence between things getting more expensive and things that are not. White House officials and many economists say the price hikes are “transitory,” and will abate by later this year. A look at the things getting more expensive suggests they’re right, with price hikes likely to cause minimal pain for most consumers.

The most startling price hike in April was for used cars, with prices up 21% during the last 12 months. There’s nothing new about used cars that suddenly makes them much more valuable. Prices are going up because a global semiconductor shortage has cut into new-car production and reduced supply. People who would otherwise buy a new car are buying used instead, with the sharp increase in demand for used cars pushing up prices.

New-car prices must be soaring, too, right? Actually, no. The cost of new vehicles rose just 2% in April, compared with a year earlier. This suggests consumers may not be spending more on cars, after all. People interested in buying a new car seem to be purchasing used ones instead, because they can’t find a new model they want. Despite a shortage of new cars, buyers are not bidding up prices. They may actually be saving money by buying used instead of new, because used vehicles are about $16,000 cheaper than new ones, on average.

Storm clouds build over rental vehicles parked outside a closed Hertz car rental office Saturday, May 23, 2020, in south Denver. (AP Photo/David Zalubowski)
Storm clouds build over rental vehicles parked outside a closed Hertz car rental office Saturday, May 23, 2020, in south Denver. (AP Photo/David Zalubowski)

Gasoline prices in April were 50% higher than a year earlier, which sounds like an inflation nightmare for any president, since nothing roils Americans more than pricey gas. But this is because of “base effects”: the price a year ago was so low that it exaggerates the year-over-year change. From February to May of last year, the widespread shutdowns caused by the coronavirus pandemic pushed the average price of gas from $2.50 a gallon to $1.88. It’s now up to around $3 per gallon, which is a big jump from last year but only about 10 cents higher than the average price of the last 10 years. Drivers can handle it.

Other notable jumps in April prices were related to travel. Airfares were 9.6% higher than a year ago, hotel prices rose 7.3% and rental car prices soared by 82%. Good! The coronavirus recession crushed the travel industry, and it’s getting back on its feet. Airfares and hotel rates are still well below pre-pandemic levels, so they’re not really expensive. Rental car rates are above pre-crisis levels, and rentals are expensive. That should ease, though, as rental agencies rebuild fleets they thinned out last year.

Furniture prices are up 7.8% during the last year, with appliances up 6.4%. As with cars, furniture and appliance makers expected more of a traditional, drawn-out recession and didn’t anticipate strong demand in 2021. That has led to supply shortages for lumber and other components that have pushed prices up. But those, too, ought to ease, as more supply comes online. Some appliances also require semiconductors, another supply problem.

Consumers are getting a break on other items. Health care costs rose just 1.4% during the last year, and rents rose just 1.8%. Prescription drug costs fell by 1.8%. Those are often a big chunk of family budgets, so some costly things are at least staying more or less constant. Clothing costs are up just 1.9% and pet product costs have barely risen.

All of this suggests consumers can find ways around rising prices. Essentials like rent and health care aren’t any more of a problem than usual, while many consumers can delay purchases of things like cars and furniture they might want but don’t have to have. Consumers have also saved a lot of money during the past year, and might not even mind spending 10% or 15% more for some things they’ve been deprived of during the pandemic.

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If there’s one area where price hikes may not ease up, it’s housing. Home prices are up about 12% during the last 12 months, and this is not a simple matter of unkinking supply chains. Housing supply is limited by permitting, available land and other factors, which tend to be local issues Washington can’t do much about.

Rising home values are tough on buyers, but homeowners end up wealthier and tend to feel better about their finances. So housing inflation isn’t as much of an outright negative as other types of inflation. Buyers priced out of the market for the time being might splurge instead on a car, and make it a new one, rather than a used one. If they can find one.

Rick Newman is the author of four books, including "Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman. You can also send confidential tips, and click here to get Rick’s stories by email.

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