This would have a negative impact on consumer price index inflation in the coming months.

By Wolf Richter for WOLF STREET.

This could be the end of the historic collapse in used car prices that has wiped out 60% of the still historic price increase during the pandemic. The price collapse that began in late 2021 has played a major role in bringing consumer price inflation down from its highs, and it would be a bummer if that trend were to reverse now.

Prices for used cars, SUVs, pickup trucks and vans sold at auction in the U.S. rose a seasonally adjusted 2.8% in July from June, the biggest increase since the uptick in early 2023, according to today’s Used Vehicle Value Index from Manheim, the largest auto auction house in the U.S., which runs about 8 million vehicles down its auction streets annually. The index is adjusted for changes in composition and mileage (red in the chart).

Without seasonal adjustment, wholesale prices rose 0.6% in July from June, which is very unusual. Prices usually fall in July after the tax refund season. In the eight years before the pandemic, prices fell an average of 0.8% in July from June. This July, they rose 0.6%.

Manheim points to unusual price increases in July in several places, including in the index of three-year-old vehicles:

“Over the last four weeks, the three-year index rose 1.1% overall, including a 0.5% increase in the last week of the month. The same four weeks brought an average decline of 0.6% between 2014 and 2019, showing that the appreciation trend for the month of July was contrary to long-term averages.”

The double-digit year-on-year price declines of the previous months were almost halved in July: Non-seasonally adjusted prices fell by 5.9 percent in July compared to the previous year, compared to -10 to -12 percent in the period from February to June.

In our report a month ago we asked: “The question everyone is asking is: How far will wholesale prices fall to compensate for this incredible price increase that should never have happened? When will they bottom out?” And today’s data may have provided the answer.

The supply of leasing returns is decreasing. Manheim said lease returns, a key source of supply for the used car market, are now declining because fewer vehicles were leased from three years ago and therefore fewer leases are now expiring, fewer lease returns are being auctioned and that the slowdown in supply will extend into 2026. Manheim expects this to put upward pressure on prices in this segment:

“We are just beginning to see shorter lease terms for the important 3-year-old vehicle segment, and these impacts will be felt later this year and into 2025 and 2026. As supply tightens for this important segment of the used car market, we expect deviations from historical average depreciation rates.”

Stocks of used cars at dealers are already becoming scarcer; they fell to 2.21 million units in June, down about 25% from June 2019, based on the most recent available data from Cox Automotive, which owns Manheim. During the entire period of vehicle shortages, there were only five months when inventories were lower.

Dealers buy at these auctions to replenish their used car inventories. Supply comes from rental fleets selling some of the vehicles they are retiring, finance companies selling their lease returns and repossessions, corporate and government fleets, other dealers, etc.

And there was unusual demand at the July auctions. Manheim added some details on the sales conversion rates:

“The average daily sales conversion rate increased to 60.1%, up three and a half points from last month and higher than we typically see this time of year. For comparison, the daily sales conversion rate in July has averaged 51.9% over the past three years.”

Prices for electric and combustion engines rose in July, not seasonally adjusted, although they should have fallen.

During the pandemic, Tesla flipping was a phenomenon where people bought new Teslas and resold them as legally used at a huge profit because used car prices in general had skyrocketed and Tesla prices even more so. This had contributed to a 145% increase in used electric vehicle prices from January 2020 to the peak of the increase in July 2022.

Then Tesla lowered its own prices starting in 2022 as production ramped up, ending Tesla flipping. And it has tried to stop Cybertruck flipping.

So used electric vehicle prices have recovered from their crazy rise, but are still way above used combustion engine prices and need to fall much further to get back on track (prices not seasonally adjusted, red = electric vehicles, blue = combustion engine vehicles, data via Manheim):

The used car CPI, The index represents retail prices and follows wholesale prices fairly closely, but not in lockstep, and tends to lag a month or two behind. The Bureau of Labor Statistics will release the Consumer Price Index for July next week, and this may not yet reflect current price trends at auctions. However, if price increases at auctions continue, they will be reflected in the Consumer Price Index for used cars over the next few months.

This chart is from our last CPI report with data through June. We now eagerly await the July data:

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