The hottest ride on Wall Street right now is the humble used car.
The cost of clunkers and dealership trade-ins has suddenly become market-moving information, with analysts, economists and traders fixating on an obscure indicator called the Manheim Used Vehicle Value Index.
“I’ve never spent so much time looking at it,” said Robert Rosener, a senior U.S. economist at Morgan Stanley. “I don’t think I’ve ever spent so much time talking about used car prices in my life, either.”
The Manheim index provides a monthly update on the prices of used cars sold in wholesale auctions. And with the used car market booming partly because of a chip shortage for new vehicles, the index offers crucial information for investors trying to answer an important question: What’s happening with inflation?
Over the last year, consumer prices have risen more than 5 percent, the fastest pace in more than a decade. This is an important consideration for virtually everyone on Wall Street. High inflation is a major threat for bond investors, because over time it erodes the real-world return of the regular interest payments they receive. Inflation also matters to stock market investors because, historically, it has prompted the Federal Reserve to increase rates, which can send shares tumbling.
The Fed has repeatedly said the recent uptick in prices is “transitory,” a result of the unusual shortages dogging the economy because of the pandemic. And right now a big reason for a surging Consumer Price Index — a key benchmark for inflation in the United States — is a shortage of automobiles.
“People had a preference for private transportation rather than public during the pandemic,” said Phoebe White, an analyst at J.P. Morgan covering the bond market. “There was sort of this exodus out of cities. So there was more of a need for cars.”
But new car production has been constrained. Factories ground to a near halt last year to keep autoworkers, who perform their tasks in close quarters, from contracting the coronavirus. And limited supplies of computer chips, a result of similar shutdowns at electronics plants, have prevented carmakers from returning to normal production this year.
So buyers have flocked to the used market, catapulting prices. In June, prices for used cars and trucks were up 45 percent from a year earlier, according to the Bureau of Labor Statistics, which produces the Consumer Price Index. That pace has slowed somewhat since, but in August used car and truck prices were still up nearly 32 percent from a year earlier.
Used car prices typically aren’t a big factor in inflation, but the big jump changed that. Analysts knew that if they could somehow predict where used car prices would be in a few months, it would give them a good sense of how high inflation would be.
“This one component, which has contributed so much to overall inflation in…
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