Wholesale prices for used cars are falling sharply as retail prices rise

(A hill) – Wholesale prices for used cars are falling off a cliff, while prices paid by car buyers are rising significantly, suggesting that dealers are making a killing while consumers are taking a bath.

Wholesale prices for used cars in the first half of October fell by 2 percent compared to September and by 10.3 percent compared to last year. Mannheim Used Car Index published on Monday.

Wholesale prices for used luxury cars fell 13.5 percent, used sports cars fell 12.3 percent, and pickup trucks fell 8.4 percent.

Meanwhile, the retail price buyers pay for used cars is up 7.2 percent from last year, according to the latest Labor Department Consumer Price Index.

Economists say the fact that dealers are paying less for cars than they were a year ago, while buyers are paying more, shows that dealers are keeping the difference.

“Dealers should not pass it on. They can make more money,” former Federal Reserve banker Claudia Sam told The Hill.

Economist Dean Baker of the Center for Economic Policy and Research said the difference was “probably partly a margin, but also a backlog.”

“If a dealer paid $5,000 for a car that would sell for $4,500 on the wholesale market today, they will probably still be looking for a price that will reimburse them for the $5,000 they paid. That could mean there is a month or two for retail prices to match wholesale prices,” he told The Hill.

A notable contrast in pricing trends in the used car market comes as the Federal Reserve raises interest rates to reduce inflation. Federal Reserve officials say that by raising interest rates, they will reduce demand, and a decrease in demand will decrease prices.

“In the United States, we … have a demand problem,” Federal Reserve Chairman Jerome Powell said at a news conference last week in which he announced another three-quarters of a percent rate hike. “We have an imbalance between supply and demand that you see in many areas of the economy. So our tools are well-suited to solving this problem.”

But some economists are asking the Fed for more details on how they expect that dynamic to play out.

“Powell’s public statements give little indication of how he expects higher rates to tame inflation,” UBS economist Paul Donovan wrote in the Financial Times last week. This is important because “today’s price inflation is more a product of profits than wages.”

“Companies have passed on more costs to customers. But they also took advantage of the circumstances to increase their profits. The expansion of inflation beyond commodity prices is more of a profit-market expansion than wage-cost pressure,” Donovan wrote.