Collapse in Used Car Prices Could Help Drive Inflation Below Fed Target

• A decline in used car prices should help drive inflation lower, according to Fundstrat’s Tom Lee.
• The Manheim used car price index fell 3.2% in the first two weeks of June and is down 9.4% year over year.
• “Manheim price index shows completely opposite trend of CPI used cars [prices],” Lee said.

A steady decline in used car prices should have a lasting effect on moving future inflation readings lower and towards the Federal Reserve’s long-term 2% target rate, according to Fundstrat’s Tom Lee.

Lee pointed out on Monday that the closely watched Manheim Used Vehicle Value Index fell 3.2% in the first two weeks of June and is down 9.4% from the end of June 2022.

That’s a sharp decline in a short period of time, with the latest data tracking at an annualized decline rate of 72% if the ongoing price drop persists at the same rate.

Lee called that a “collapse,” adding that used car prices could be down 6% by the end of June if the ongoing drop persists.

“This drop in Manheim used car prices is a positive… This [is] a bigger deal than many realize,” he said.

That’s because while market-based prices for used cars are falling, the used car price data utilized by the Labor Department’s consumer price index report has shown a monthly increase of 4.4% in the last two months.

Lee highlighted that the annualized rates of the most recently used car pricing data shows a stark difference, with the 72% annualized decline in the Manheim index and a 50% annualized increase in the CPI’s official used car data.

“Manheim price index shows completely opposite trend of CPI used cars… The takeaway is CPI is arguably lagged and does not reflect the reality of inflation today,” he said.

The stark difference in used car pricing data should eventually end as the CPI data catches up, helping put downward pressure on future CPI reports. Used car prices were up 0.15% in the May Core CPI report, which represented 33% of the reported 0.44% inflation rate last month.

Lee estimated that used car prices should have been down 0.20% instead of being up 0.15%.

“If we apply -0.20% for used cars, May Core CPI would be 0.09%. That is a 1% inflation rate for core” even when you consider the continued rise in shelter prices, he said.

The data suggested to Lee that once the CPI used car pricing data catches up to the current market dynamic of falling car prices, that should help tame inflation and ultimately give more reason to the Fed to pause further interest rate hikes.

Such a decline in inflation and a pause in tightening would likely be viewed favorably by investors and lead to a higher stock market. Lee continues to expect the S&P 500 to close 8% higher from current levels to 4,750 by the end of the year.