Global Daily – Signs of a peak in US autos inflation

 As discussed in our Daily Insight last Tuesday, the principal driver of the inflation overshoot in the US of the past few months has been in autos, and especially used cars. In June, prices in this component grew a massive 45% yoy, and contributed 1.8pp to the 4.5% rise in the core CPI (new cars contributed a further 0.2pp to the rise). Indeed, stripping out this relatively narrow component of inflation yields a core CPI measure that is much more modest than suggested by the headline number (see chart below). Despite this, fears persist that the recent rise in inflation is a sign of a general overheating in the US economy, and this could in turn have policy implications. For instance, some FOMC members, such as St Louis Fed president James Bullard, have called for a more rapid winding down of asset purchases, while the Biden administration is finding itself politically on the defensive over its massive fiscal spending plans, and their potentially inflationary implications. As such, the near-term outlook for inflation is key – as is any evidence that the ‘transitory’ narrative on inflation is proving to be correct. We are now seeing such evidence.

Cooling in demand appears to be hitting prices – The primary driver of the dramatic rise in used car prices – a surge in stimulus-fuelled demand for cars generally – is easing dramatically. At their peak, new car sales were 18.5mn in April on an annualised basis – 10% above their pre-pandemic level, and the highest sales volumes since 2005. This drove total nominal car sales (which also includes used cars) to 34% above their pre-pandemic level. Since then, both measures have declined significantly, and as of June new car volumes were around 8.5% below pre-pandemic levels, and nominal retail sales were 25% above pre-pandemic levels (we believe the massive price rises in used cars are responsible for the still elevated nominal figures, but we will get a clearer read on this when real private consumption data is published at the end of the month). This fall-off in demand appears now to be feeding through to prices – with a lag; high frequency data published by Manheim Consulting suggests used car prices fell by 1.7% already in the first two weeks of July. By our estimates, this by itself would knock off around 0.2pp from annual core CPI inflation in July. In other words, autos looks set to go from being a significant support for inflation to a significant drag over the coming months – suggesting we likely saw a peak in the June CPI report. (Bill Diviney)