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Inflation Has Been Easing Fast, but Wild Cards Lie Ahead

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Will inflation continue to slow at a solid pace? Economists are warily watching a few key areas, like housing and cars.President Biden has openly celebrated recent inflation reports, and Federal Reserve officials have also breathed a sigh of relief as rapid price gains show signs of losing steam.But the pressing question now is whether that pace of progress toward slower price increases — one that was long-awaited and very welcome — can persist.The Fed’s preferred inflation measure, the Personal Consumption Expenditures index, is expected to tick up to 4.2 or 4.3 percent in a report on Thursday, after volatile food and fuel costs are stripped out. That would be an increase from 4.1 percent for the core measure in June. And while it would still be down considerably from a peak of 5.4 percent last summer, such a reading would underscore that inflation remains stubbornly above the Fed’s 2 percent goal and that its path back to normal is proving bumpy.Most economists are not hugely concerned. They still expect inflation to ease later this year and into 2024 as pandemic disruptions fade and as consumers become less willing to accept ever-higher prices for goods and services. American shoppers are feeling the squeeze of both shrinking savings and higher Fed interest rates.But as price increases slow in fits and starts, they are keeping economic officials wary. Big uncertainties loom, including a few that could help inflation to fade faster and several that could keep it elevated.The Base Case: Inflation is Expected to Cool.Price increases have slowed across a range of measures this summer. The overall Consumer Price Index — which feeds into the P.C.E. numbers and is released earlier each month, making it a focal point for both analysts and the media — has slowed to 3.2 percent from a 9.1 percent peak in June 2022.And as consumers have experienced less dramatic price jumps, their expectations for future inflation have come down. That’s good news for the Fed. Inflation expectations can be a self-fulfilling prophecy: If consumers expect prices to climb, they may both accept cost increases more easily and demand higher pay, making inflation harder to stamp out.Still, the moderation has not been enough for policymakers to declare victory. Fed officials have been trying to slow the economy and contain inflation since early 2022. Jerome H. Powell, the Fed chair, vowed during a speech last week at the Jackson Hole symposium that they will “keep at it” until they are positive inflation is coming under control.“Inflation is going the right way,” said Gennadiy Goldberg, a rates strategist at T.D. Securities. But it is like a fire, he said: “You want to kill its very last ember, because if you don’t, it can flare back up in an instant.”The Good News: Rents and China.There are reasons to believe that inflation is in the process of being sustainably doused.Slower rent increases should help to weigh down overall inflation for at least the next year, several economists said. Rents for newly leased apartments spiked in the pandemic as people moved cities and ditched their roommates. Market-based rents began to cool last year, a shift that is only now feeding its way into official inflation data as people renew their leases or move.The slowdown in inflation is also getting a helping hand from an unexpected source: China. The world’s second-largest economy is growing much more slowly than expected after reopening from pandemic lockdowns. That means that fewer people are competing globally for the same commodities, weighing on prices. And if Chinese officials respond to the slump by trying to ramp up exports, it could make for cheaper goods in the global marketplace.And more generally, Fed policy should help to pull down inflation in the months to come. The central bank has raised interest rates to a range of 5.25 to 5.5 percent over the past year and a half. Those higher borrowing costs are still trickling through the economy, reducing demand for big purchases made on credit and making it harder for companies to charge more.The Bad News: Gas, Travel Prices, Healthcare.Travelers at La Guardia Airport in New York. Rising fuel costs can feed into other prices, like airfares.Desiree Rios/The New York TimesBut a few key products could spell trouble for the inflation outlook. Gas is one.AAA data show gas prices have popped to more than $3.80 per gallon, up from about $3.70 a month ago, amid refinery shutdowns and global production cuts.Fed officials mostly ignore gas when they are thinking about inflation, because it jumps around thanks to factors that policymakers can’t do much about. But gas prices matter a lot to consumers, and their inflation expectations tend to increase when they pop — so central bankers can’t look past them entirely. Beyond that, gas prices can feed other prices, like airfares. Nor is it just gas and travel costs that could stop pulling inflation down so quickly. Economists at Goldman Sachs expect health care prices to pick up as hospitals try to make up for a recent pop in their labor costs, propping up services inflation.The Uncertain News: Cars and Growth.Used cars have also been helping to subtract from inflation, but it is increasingly uncertain how much they will help to pull it down going forward.Many economists think the trend toward cheaper used automobiles has more room to run. Dealers have been paying a lot less for used cars at auction this year, and that trend may have yet to fully reach consumers. Plus, some new car producers have rebuilt inventories after years of shortages, which could relieve pressure in the auto market as a whole (electric vehicles in particular are piling up on dealer lots).But, surprisingly, wholesale used car costs ticked up very slightly in the latest data.“The used car market is turning, and the reason for that is pretty simple: Demand has been way higher than dealers had expected,” said Omair Sharif, founder of Inflation Insights. Add to that the possibility of a United Auto Workers strike — the union’s contract expires in mid-September — and risks lay ahead for car inventories and prices, he said.In fact, sustained demand in the used car market is symptomatic of a broader trend. The economy seems to be holding up even in the face of much-higher interest rates. Home prices have climbed since the start of the year in spite of hefty mortgage rates, and data released Thursday is expected to show that consumer spending remains strong.That more general risk — the possibility of an economic acceleration — is perhaps the biggest wild card facing policymakers. If Americans remain willing to open their wallets in spite of swollen price tags and higher borrowing costs, it could make it difficult to tamp down inflation completely.“We are attentive to signs that the economy may not be cooling as expected,” Mr. Powell said last week. More

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    Inflation Persists and Car Prices Are a Big Reason

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    Prices of new and used vehicles were supposed to recede quickly as supply chain problems dissipated. The market had other ideas.‌Car prices soared after the coronavirus lockdowns, and two years into the United States’ worst inflationary episode since the 1980s, the industry demonstrates that getting back to normal will be a long and lurching ride.In 2021 and early 2022, global shipping problems, a semiconductor shortage and factory shutdowns coincided with strong demand to push vehicle prices sharply higher. Economists had hoped that prices might ease as supply chains healed and the Federal Reserve’s interest rate increases deterred borrowers.Instead, prices for new cars have risen further. Domestic automakers are still producing fewer cars and focusing on more profitable luxury models. Used car prices helped to lower overall inflation late last year, but rebounded in April as short supply collided with a surge in demand.Echoes from the industry’s pandemic disruptions are reverberating through the economy even though the emergency has formally ended, and illustrate why the Fed’s fight to quash inflation could be a long one as consumers continued spending despite higher prices.A Wild Ride for Car PricesUsed car prices have been volatile, while new car costs have continued to climb, adding to overall inflation.

    Source: Bureau of Labor Statistics By The New York Times“Inflation is not going to be a smooth path downward — there are going to be bumps along the road,” said Blerina Uruci, chief U.S. economist at T. Rowe Price. “There are so many idiosyncratic factors at play right now, and I think some of that has to do with demand post-pandemic.”Elevated car prices have proved uncomfortably sticky. Used car prices have declined, but in a more muted — and volatile — fashion than economists had anticipated. And new cars have continued to get more expensive this year as manufacturers strive to maintain the margins established in 2021.“The big question now is: Are companies going to start competing with one another on price?” Ms. Uruci asked.But that’s a difficult question to answer, because the automotive market has drastically changed. To understand the situation, it’s useful to examine how the auto industry worked before.“Going into the pandemic, the dynamic in the automobile business was this idea that retail profitability was under constant pressure, driven by the internet,” said Pat Ryan, the chief executive of CoPilot, a car shopping app that monitors prices across about 40,000 dealerships.Automakers produced more cars than the marketplace demanded, offering incentives to clear inventory and compete with lower-cost imports. Dealers made their profits on volume and financing, often resulting in customer complaints of excess fees.As the coronavirus spread, factories shut down. Even when they reopened, semiconductors remained scarce. Manufacturers allocated chips to their highest-priced models — trucks and sport utility vehicles — offsetting lower volume with higher profits on each sale. About five million cars that normally would have been produced never were, Mr. Ryan said.Dealers got in on the action, charging thousands of dollars above list price — especially as stimulus programs rolled out, and consumers sought to upgrade their vehicles or buy new ones to escape cities. A study by the economist Michael Havlin, published by the Bureau of Labor Statistics, found that dealer markups accounted for 35 percent to 62 percent of total new-vehicle consumer inflation from 2019 to 2022.There were downsides to the lower sales volumes; dealerships also make money on service packages years after cars drive off the lot. But on balance, “it was the best of times for car dealers, for sure,” Mr. Ryan said.It was the worst of times, however, for anyone who suddenly needed a car.Hailey Cote with her recently purchased Toyota Corolla.Ross Mantle for The New York TimesThat’s the position that Hailey Cote of Pittsburgh found herself in last summer. After tiring of low-wage jobs on farms and in restaurants, she built a business cleaning houses for $25 an hour. When her 2005 Jeep Grand Cherokee broke down, she knew she had to find a replacement quickly to ferry cleaning gear to each job and get to school, where she’s pursuing a degree in counseling.At that point, the used cars she could find were only a few thousand dollars less than the cheapest new cars, so she went with a 2022 base model Toyota Corolla. Her loan payment is about $500 a month. Insurance, which has also become more expensive, is another $200. Including gas and maintenance, Ms. Cote’s transportation cost is almost as much as her rent, leaving nothing for savings or recreation.“I think it’s the basic necessities that are really the worst,” Ms. Cote, 29, said. “Food’s gone up a bit, but the cost of housing, health care and cars is pretty brutal.”The car price frenzy began to ease in the second half of 2022, as more vehicles started rolling off assembly lines. But the supply has risen only gradually. Automakers, loath to relinquish profits enabled by scarcity, started talking about exercising “discipline” in their production targets.“During this two-year period, auto dealers and auto manufacturers discovered that a low-volume, higher-price model was actually a very profitable model,” Tom Barkin, the president of the Federal Reserve Bank of Richmond, said in an interview.Car Dealers Reap Big Profits in Inflation EraCar companies have been increasing prices by more than their input costs have climbed, leading to big profits on new vehicles.

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    Percent markups for publicly traded dealerships
    Source: Michael Havlin (Bureau of Labor Statistics)By The New York Times“The experience of higher prices, and the ability to move prices, does broaden the perspectives of business people in terms of what their options are,” he said. “It’s attractive if you can do it.”One way the automakers tried to buoy prices was jettisoning cheaper models, like the Chevrolet Spark and Volkswagen Passat. Responding to federal subsidies, car companies rolled out electric vehicles, but that didn’t help to bring prices down — they started with luxury versions, like the $42,995 Mustang Mach-E.And there have been added supply constraints. The generation of cars that would typically be coming off three-year leases is smaller than usual. Those who leased cars in the spring of 2020 have an incentive to buy them at the prices that were locked in before everything became more expensive.On top of that, some rental car companies are aggressively restocking their fleets after being starved for several years, leading dealership groups like Sonic Automotive to complain on earnings calls that they’re being outcompeted at auctions.“There are so many sources of used vehicles that just dried up over the last few years,” said Satyan Merchant, a senior vice president for financial services at TransUnion, a credit monitoring company. “And it all has this downstream effect.”The Fed has been raising interest rates sharply to slow demand — including for cars — and cool price increases. But during the adjustment period, that is making it even tougher for many Americans to afford a vehicle. According to TransUnion, the average monthly payment for a new car rose to $736 in the first quarter of 2023, from $585 two years before. Used cars average $523 per month, up $110 over the same period.Prices for Cars of All Ages Are Above Prepandemic LevelsA new car will run you about $51,000 on average – about 30 percent more than in January 2020. 

    Source: CoPilotBy The New York TimesCars are now a bifurcated market: Demand remains strong on the high end, where wealthy buyers with excess savings from the past two-plus years are able to absorb higher interest rates, or simply pay cash. Some are only now receiving vehicles they ordered in 2022 at inflated prices.Competition for vehicles is also fierce on the low end, since people with thin financial cushions and in-person jobs can’t afford to forgo transportation, which in most of the country is synonymous with a car. The job market has remained strong, especially for in-person jobs in fields like hospitality and health care, so more people have workplaces to get to.And many people in between, who might switch cars every few years, are waiting for prices to fall.“What we’ve seen is the disappearance of the middle,” said Scott Kunes, chief operating officer of a dealership group in the Midwest. He faults the automakers for abandoning cheaper, smaller, basic cars that people need just to get around, especially as interest rates put fancier versions beyond reach. “It doesn’t make any sense to me at all.”The situation may start to resolve itself soon. Wholesale car prices have begun to fall, and carmakers are offering more incentives. Kelley Blue Book data shows that average prices have fallen below list for the past two months, which Jonathan Smoke, chief economist at Cox Automotive, said signaled that demand was easing. Prices have come down in recent months for electric cars — the fastest-growing segment of new car sales, though a small portion of the overall market.Recent history has shown, however, that pricing trajectories are rarely linear. Adam Jonas, an auto industry analyst with Morgan Stanley, said that over the short to medium term, more inventory was the only answer.“Even though the statements from the Japanese and the Koreans are that the chip shortage is ending, it takes many months to spool it up,” he said. “Dealers should prepare for a tight summer.”Jack Ewing More

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    Falling Used-Car Demand Puts Pressure on Carvana and Other Dealers

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    Dealerships are seeing sales and prices drop as consumers tighten their belts, putting financial pressure on companies like Carvana that grew fast in recent years.About a year ago, the used-car business was a rollicking party. The coronavirus pandemic and a global semiconductor shortage forced automakers to stop or slow production of new cars and trucks, pushing consumers to used-car lots. Prices for pre-owned vehicles surged.Now, the used-car business is suffering a brutal hangover. Americans, especially people on tight budgets, are buying fewer cars as interest rates rise and fears of a recession grow. And improved auto production has eased the shortage of new vehicles.As a result, sales and prices of used cars are falling and the auto dealers that specialize in them are hurting.“After a huge run up in 2021, last year was a reality check,” Chris Frey, senior manager of economic and industry insights at Cox Automotive, a market research firm. “The used market now faces a challenging year as demand weakens.”According to Cox, used-car values fell 14 percent in 2022 and are expected to fall more than 4 percent this year. That shift means many dealers may have no choice but to sell some vehicles for less than they paid.The industry’s difficulties have been exemplified by Carvana, which sells cars online and became famous for building “vending machine” towers where cars can be picked up. The company recently reported a quarterly loss of more than $500 million, and has laid off 4,000 employees.In the last 12 months, Carvana piled up debt. Its stock price has fallen by more than 95 percent in the last 12 months, and three states temporarily suspended its operating license after consumer complaints.“We think there’s a decent chance the company will end up having to file for bankruptcy protection,” said Seth Basham, an Wedbush analyst. “They have too much debt for the level of sales and profitability and can’t support that debt load, and likely will need to restructure.”In a statement to The New York Times, Carvana said it was confident it had “sufficient” funds to turn its business around, noting the company had $2 billion in cash and an additional $2 billion in “other liquidity resources” at the end of the third quarter.It has also hired the investment bank Moelis & Company and is working to reduce its inventory of vehicles and cut the cost of reconditioning them.Used-car values fell 14 percent in 2022. Some dealers may have no choice but to sell some vehicles for less than they paid.An Rong Xu for The New York Times“Millions of satisfied customers have responded positively to Carvana’s e-commerce model for buying and selling cars,” the company said. “Although the current environment and market has drawn attention to the near term, we continued to gain market share in the third quarter of 2022, and we remain focused on our plan to drive to profitability.”CarMax, another used-car giant, is also hurting, although it is on much steadier ground. In the three months that ended in November, its vehicle sales fell 21 percent to 180,000, and net income tumbled 86 percent, to $37.6 million.Inflation F.A.Q.Card 1 of 5What is inflation? More

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    How the Car Market Is Shedding Light on a Key Inflation Question

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    How easily companies give up swollen profits could determine how easily the Federal Reserve can cool inflation. Dealerships offer clues.In a recent speech pointedly titled “Bringing Inflation Down,” Lael Brainard, the Federal Reserve’s vice chair, zoomed in on the automobile market as a real-world example of a major uncertainty looming over the outlook for price increases: What will happen next with corporate profits.Many companies have been able to raise prices beyond their own increasing costs over the past two years, swelling their profitability but also exacerbating inflation. That is especially true in the car market. While dealerships are paying manufacturers more for inventory, they have been charging customers even higher prices, sending their profits toward record highs.Dealers could pull that off because demand has been strong and, amid disruptions in the supply of parts, there are too few trucks and sedans to go around. But — in line with its desire for the economy as a whole — the Fed is hoping both sides of that equation could be on the cusp of changing.“With production now increasing, and interest-sensitive demand cooling, there may soon be pressures to reduce vehicle margins and prices in order to move the higher volume of cars being produced off dealer lots,” Ms. Brainard explained during her remarks.The Fed has been raising interest rates to make borrowing for big purchases — cars, houses, business expansions — more expensive. The goal is to cool demand and slow the fastest inflation in four decades. Whether it can pull that off without inflicting serious pain on the economy will hinge partly on how easily companies surrender their hefty profits.If companies begin to lower prices to compete for customers as demand abates, price increases might slow without costing a lot of jobs. But if they try to hold on to big profits, the transition could be bumpier as the Fed is forced to squeeze the economy more drastically and quash demand more severely.“There has been a giant shift in bargaining power between consumers and corporations,” said Gennadiy Goldberg, senior U.S. rates strategist at TD Securities. “That’s where the next adjustment has to come — corporations have to see some pain.”The example of the auto industry offers reasons for hope but also caution. While there are signs that price increases for used cars are beginning to moderate as supply recovers, that process has been halting, and the new-car market illustrates why the path toward lower profits that help slow inflation could be a long one.That’s because three big forces that are playing out across the broader economy are on particularly clear display in the car market. Supply chains have not completely healed. Demand may be slowing down, but it still has momentum. And companies that have grown used to charging high prices and raking in big profits are proving hesitant to give up.The auto market split into two segments that are now diverging — new cars and used cars.New-car production was upended as the pandemic shut down factories making semiconductors and other parts, and it is only limping back. Freshly minted vehicles remain extraordinarily scarce, according to dealers and data, and several industry experts said they didn’t see a return to normal levels of output for years as supply problems continue. Prices are still increasing swiftly, and dealer profits remain sharply elevated with little sign of cracking.Inflation F.A.Q.Card 1 of 5What is inflation? More

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    Inflation Cooled in July, Welcome News for White House and Fed

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    Prices have increased rapidly since last year, but barely budged in July — a positive development, though not yet enough for a victory lap.Inflation cooled notably in July as gas prices and airfares fell, a welcome reprieve for consumers and a positive development for economic policymakers in Washington — though not yet a conclusive sign that price increases have turned a corner.The Consumer Price Index climbed 8.5 percent in the year through July, a slower pace than economists had expected and considerably less than the 9.1 percent increase in the year through June. After food and fuel costs are stripped out to better understand underlying cost pressures, prices climbed 5.9 percent, matching the previous reading.The marked deceleration in overall inflation — on a monthly basis, prices barely moved — is another sign of economic improvement that could boost President Biden at a time when rapid price increases have been burdening consumers and eroding voter confidence. The new data came on the heels of an unexpectedly strong jobs report last week that underscored the economy’s momentum.The slowdown in overall inflation stemmed from falling prices for gas, airfares, used cars and hotel rooms, which canceled out increases in critical areas like food and rent. Because the categories in which prices fell can be volatile, and because some of the goods and services that are rapidly increasing in price tend to be slower moving, the report’s underlying details suggest that inflation pressures remain unusually hot below the surface. More

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    Few Cars, Lots of Customers: Why Autos Are an Inflation Risk

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    Economists are betting that supply chains for all kinds of goods will heal, shortages will ease and price gains will slow. Cars are a wild card in those forecasts.Corina Diehl is eager for more sedans and pickup trucks to sell her customers in and around the Pittsburgh area, but as the pandemic enters its third year, cars remain in short supply and the squeeze on inventory shows no sign of abating.“If I could get 100 Toyotas today, I would sell 100 Toyotas today,” Ms. Diehl said. Instead, she said, she’s lucky to have three. “It’s the same with every brand I have.”Dealerships like Ms. Diehl’s are wrestling with inventory shortages — the result of a dearth of computer chips, production disruptions and other supply chain snarls. That’s not a problem just for car buyers, who are paying more; it’s also a problem for economic policymakers as they try to wrestle the fastest inflation in four decades under control.Car prices have helped push inflation sharply higher over the past year, and economists have been counting on them to level off and even decline in 2022, allowing the rising Consumer Price Index to moderate markedly.Rapid Car Inflation Year-over-year change in select automotive categories of the Consumer Price Index

    Source: Bureau of Labor Statistics, accessed via FREDBy The New York TimesBut it is increasingly unclear how much and how quickly car prices will slow their ascent, because of repeated setbacks that threaten to keep the market under pressure. While price increases are showing some early signs of slowing and used car costs, in particular, are unlikely to climb at the same breakneck pace as last year, continued shortfalls of new vehicles could keep prices elevated — even rising — longer than many economists expected.“We’ve stumbled into another pattern of a series of unfortunate events,” said Jonathan Smoke, the chief economist at Cox Automotive, an industry consulting firm. Shutdowns meant to contain the coronavirus in China, computer chip factory disruptions tied to a recent earthquake in Japan, the aftereffects of the trucker strike in Canada and the war in Ukraine are adding up to slow production.Mr. Smoke expects new car prices to keep rising this year — perhaps even at nearly the same pace as last year — and used cars to begin to depreciate again, but said the shortage of new cars could spill over to blunt that weakening. And used cars may not fall in price at all if rental companies begin to snap them up as they did in 2021.“If the supply situation gets worse, it’s still possible that we repeat some of what we had last year,” he said.Mr. Smoke’s predictions — and worries — are more grim than what many economists are penciling into their forecasts.Alan Detmeister, a senior economist at UBS and former chief of the Federal Reserve Board’s wages and prices section, said he expected a 15 percent decline in used car prices by the end of the year, with new car prices falling 2.5 to 3 percent.Those estimates are predicated on an increase in supply.“This is a huge wild card in the forecast,” Mr. Detmeister said. But even if production doesn’t pick up, “it is extremely unlikely that we’ll see the kind of increases we saw last year,” he added, referring to prices.Omair Sharif, founder of Inflation Insights, a research firm, said he was still expecting improved supply and slower demand to help the used car market come into balance. While used car prices may rise for a few months as households spend tax refunds on automobiles, he expects the increase to be modest in part because they already nearly match new car prices.“I would be shocked if the used car market really accelerated,” he said. New car prices are a more complicated story, he added: “There, we have legitimately serious inventory problems.”Automakers are struggling to ramp up production. Russia’s invasion of Ukraine has created shortages in electrical components needed for cars, prompting S&P Global Mobility to cut its 2022 and 2023 forecasts for U.S. production. More critically, the chips needed to power everything from dashboards to diagnostics remain in short supply. Ford Motor and General Motors temporarily shut down some U.S. factories last week because of supply issues, and the industry broadly cannot ship as many cars as customers want to buy.In cars, “production remains below prepandemic levels, and an expected sharp decline in prices has been repeatedly postponed,” Jerome H. Powell, the Fed chair, said during a speech last month. He noted that while supply chain relief in general seemed likely to come over time, the timing and scope were uncertain.Cars loaded in Kansas City, Kan., for transport to a dealership in Wichita, Kan. Automakers are struggling to ramp up production as repeated shocks rock the industry.Chase Castor for The New York TimesAnalysts had been hoping that chip shortages, in particular, would ease up, but “we’ve got at least another year, if not more,” for the supply chain to heal, said Chris Richard, a principal in the supply chain and network operations practice at the consulting firm Deloitte.While smaller electronics producers may be able to find enough semiconductors, he said, cars contain hundreds or even thousands of chips — often different kinds — and many auto companies do not have direct and close relationships with their providers.The earthquake in Japan temporarily shut down chip plants that supply the auto industry, costing a few weeks of production at one. Making chips requires neon, and much of it comes from Ukraine. Lockdowns in Shanghai may reduce chip production at some Chinese factories.At the same time, demand is booming. Ford reported record retail vehicle orders in March, including for its F-series trucks, which remained in demand even as gas prices jumped.Car buying could begin to slow as the Fed raises interest rates, making car loans more expensive, but so far there is little sign that is happening. In fact, demand has been so strong that automakers have been cracking down on dealers that charge above list price, threatening to withhold fresh inventory.“I don’t see the prices subsiding. You don’t need them to subside,” said Joseph McCabe at AutoForecast Solutions, an industry analyst, explaining that dealer costs are increasing and companies want to protect their profits. “Prices will go up, and there will be less negotiating space for consumers, because there’s high demand and no availability.”Mr. McCabe does not think that car inventory will ever fully rebound: Dealers and automakers have learned that they make more money by effectively making cars to order and running with learner inventory. If that’s the case, the permanently restrained supply could have implications for the rental and used car markets.If car prices keep climbing briskly, it will be hard for inflation overall to moderate as much as economists expect — to around 4 to 4.5 percent as measured by the Consumer Price Index by the end of the year, according to a Bloomberg survey, down from 7.9 percent in February.That’s because prices for services, which make up 60 percent of the index, are also climbing robustly. They increased 4.8 percent in the 12 months through February, and could remain high or even continue to rise as labor shortages bite.Of the goods that make up the other 40 percent of the index, food and energy account for about half. Both have recently become markedly more expensive and, unless trends change, seem likely to contribute to high inflation this year. That puts the onus for cooling inflation on the products that make up the remainder of the index, like cars, clothing, appliances and furniture.While the Fed’s policy changes could tamp down demand and eventually slow prices, policymakers and economists had been hoping they would get some natural help as supply chains for cars and other goods worked themselves out.“We still expect some deflation in goods,” Laura Rosner-Warburton, an economist at MacroPolicy Perspectives, said of her forecast. She said that she expected fuel prices to moderate, and that her call included some “modest declines” in vehicle prices.It’s not just economists who are hoping that forecasts for a rebounding supply and more moderate car prices come true. Buyers and dealers are desperate for more vehicles. Ms. Diehl in Pittsburgh sells makes including Toyota, Volkswagen, Hyundai and Chevrolet, and companies have told her that inventory may begin to recover toward the end of the year — a reprieve that seems far away.Her customers are hungry for trucks, electric vehicles and whatever else she can get her hands on. When one of her dealerships lists a new car on its website in the evening, a buyer will show up first thing in the morning, she said. Her dealerships have a backlog of 400 to 500 parts to fix cars, up from 10 to 20 before the pandemic.“It’s absolute insanity at its finest,” Ms. Diehl said. “I don’t see an abundance of inventory before 2023 and 2024.” More

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    Car Prices Rose More Slowly In January, But New Disruptions Loom

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    Year-over-year changes in the Consumer Price Index
    Not seasonally adjustedSource: Bureau of Labor StatisticsBy The New York TimesWant an optimistic take on the troubling January inflation report? Look at what’s happening with cars.Want a pessimistic take? Look at what’s happening with cars.New-car prices have skyrocketed over the past year, rising 12.2 percent as supply-chain disruptions and other issues have made it hard for manufacturers to keep up with strong consumer demand. Used-car prices are up by a remarkable 40.5 percent. Those rapid price gains have been a big factor in overall inflation, accounting for close to a quarter of the one-year increase in the Consumer Price Index.Optimists, including White House officials, have pointed to car prices as evidence that the recent bout of high inflation is likely to prove short-lived. The car market has been disrupted by a confluence of unusual forces, most of them related to the pandemic. As those forces recede, auto production should return to normal, and prices should moderate, or perhaps fall outright.The data released on Thursday provided support for that narrative. New-car prices were flat in January compared with December. Used-car prices rose 1.5 percent, their slowest pace since September, and data on wholesale prices suggests that moderation is likely to continue. Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a note to clients that he expects both new and used vehicle prices to fall in coming months, which would help bring down inflation overall.But a new development is threatening that progress. Protesters in Canada have blockaded some of the busiest routes linking Canada to the United States, disrupting supply chains of some of the biggest automakers. Ford, Toyota and General Motors have all had to pause production or reduce output at some plants as a result of the protests.It isn’t clear how long those disruptions will last, or how much of an impact they will have on auto supplies. But if they prevent the car market from returning to normal as quickly as expected, that could delay the moderation in inflation that economists had expected to see and that the Biden administration had been counting on. More

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    Supply Chain Problems Mean Buying a Car Sometimes Takes a Plane Ride

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    The limited supply of new and used vehicles is forcing some Americans to go to great lengths to find and buy them, including traveling to dealers hundreds of miles away.When Rachael Kasper started shopping for a new car in August, she had her heart set on a Ford Escape plug-in hybrid. The problem was that Ford hasn’t made many of them this year because of a computer chip shortage that has slowed auto production around the world.Ms. Kasper first came up empty in her home state of Michigan and, later, in neighboring states. When she expanded to the East Coast, she found one — at a dealership 537 miles away, in Hanover, Pa.“I flew to Baltimore, took a Lyft to the dealer, and then drove all the way home,” said Ms. Kasper, who owns a water-sports equipment retailer. “It was quite an adventure.”The shortage of computer chips, in large part caused by decisions made in the early days of the pandemic, has rippled through the auto industry this year. Manufacturers have had to close plants for lack of parts, leaving car dealers with millions fewer vehicles to sell.As a result, car buyers have had to travel hundreds of miles to find the vehicles they want, give up on haggling and accept higher prices, and even snap up used cars that have been repaired after serious accidents.The supply squeeze coincides with an apparent increase in demand. Some people are trying to avoid mass transit or taxis. Others simply want a vehicle. Many families have saved thousands of dollars thanks in part to government benefits and stimulus payments and because they have been spending less on travel, restaurant meals and other luxuries that have fallen by the wayside because of health concerns.The end of the year is normally a peak selling season, with some automakers running ads in which cars are presented as gifts complete with giant bows. But this year consumers are finding that locating the car of their desires is not quick, easy or cheap.As Ed Matovcik, a wine industry executive in Napa, Calif., neared the end of his lease on a Tesla Model S, he decided to switch to a Porsche Taycan, a German electric car. He ordered one, but it won’t arrive until May, three months after he has to give up the Tesla.He is planning on renting cars until the Taycan arrives and is looking on the bright side. “It’s a different world now, so I don’t really mind the wait,” he said. “I’m thinking of renting a pickup for a week so I can finally clear out my garage.”The disruption to car production has rippled through the automotive world. For a time in the spring and summer of 2020, rental car companies stopped buying new cars and sold many of their vehicles to survive while travel was restricted. Now those companies are seeking to take advantage of a hot rental market and are scrambling to buy cars, often competing with consumers and dealers.The big discounts and incentives that were once standard features of car-buying in the United States have all but disappeared. Instead, some dealers now add an extra $2,000 or $3,000 on top of the list price for new cars. That has left car buyers fuming, but the dealers who are jacking up prices know that if one customer balks, another is usually waiting and willing.In November, the average price of a new car was a record $45,872, up from $39,984 a year ago, according to Edmunds, an auto-data provider. The average price paid for a used car is now more than $29,000, up from $22,679 in 2020, and Edmunds expects it to exceed $30,000 next year for the first time ever.Because of the rising prices of used cars, some consumers are spending to fix up older vehicles and keep them going for longer. More cars that have been damaged in accidents are getting fixed instead of being declared a total loss by insurers and sent to the scrap yard.“The math has changed on whether a car is totaled,” said Peter DeLongchamps, a senior vice president at Group 1 Automotive, a Houston-based auto retailer that operates its own chain of auto-body shops. “Our parts and service business is very good. We’re seeing more cars getting fixed based on the high used values.”Workers assembled a Jeep Grand Cherokee L at a Stellantis plant in Detroit in June. A computer chip shortage has slowed auto production around the world.Bill Pugliano/Getty ImagesThe auto industry’s chip shortage stems from the start of the pandemic, in the spring of 2020, when automakers closed factories for weeks and cut orders for computer chips and other parts. At the same time, homebound consumers were snapping up laptops, game consoles and other electronics, spurring makers of those devices to increase orders for semiconductors. When automakers resumed production, they found chip suppliers had less production capacity for them.As a result, automakers have produced significantly fewer trucks and cars this year than they had planned. In addition to closing plants, they’ve built vehicles without certain features, such as heated seats and electronics that maximize fuel economy. Tesla dropped power lower-back support in the passenger seat of certain models.The Coronavirus Pandemic: Key Things to KnowCard 1 of 4The Omicron variant. More

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    Wholesale Used Car Prices Rise, Pointing to Higher Inflation

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    One of the most closely watched leading indicators of inflation on Wall Street has hit a record high, a sign that upward pressure on prices could last for months to come.The prices that dealers pay for used cars in the wholesale market jumped 5.3 percent from August to September, according to the Manheim Used Vehicle Value Index. It’s up 27.1 percent from last year.Used car prices have soared since the pandemic hit, when production snarls at automakers cut the supply of new vehicles as many Americans left urban centers for the suburbs, pushing up demand for personal vehicles.While used car prices are normally a tiny contributor to the overall movement of the Consumer Price Index, one broad measure of inflation, they have become a key influence on the direction of prices.Analysts hoping to get a good read on where inflation is heading have taken note of the Manheim index’s predictive power. As a wholesale price index, it offers a preview of the price changes that consumers will see roughly two months later, after dealers pass on their costs to buyers at the lot.The movement of the Manheim index this summer suggested that consumer prices for used cars were set to cool off, which might mean overall price increases would moderate. But the latest reading suggested that the demand and prices for used cars had reinvigorated as production issues for computer chips continued to hamper new car production. Recent storms, which resulted in potentially hundreds of thousands of flooded cars, have also contributed to demand.“The new-vehicle production problem worsened instead of getting better in Q3,” wrote Jonathan Smoke, the chief economist for Cox Automotive, the company that produces the index. “Used inventory issues were further exacerbated by damage to vehicles caused by Hurricane Ida in late August, putting pressure on an already historically tight market.” More