Consumer Prices and Cars

Episode Summary

Executive Summary: The episode centered on a hotter-than-expected CPI print, but the hosts argued much of the inflation surge was transitory, driven by reopening items and vehicle prices. The bulk of the conversation focused on the auto market: chip shortages, tight inventories, pent-up demand, loan performance, and the rise of EVs and autonomous vehicles. The panel debated how much vehicle demand will rebound and whether current price spikes will persist.

Main Topics: Hot CPI and the inflation outlook (Priority: 5/5): The hosts reviewed the stronger-than-expected CPI report and argued that most of the month’s upside came from temporary reopening effects and vehicle prices, leaving underlying inflation closer to target. Vehicle prices and semiconductor shortages (Priority: 5/5): Mike Brisson explained that used and new vehicle prices are being pushed up by pandemic-era demand shifts and a shortage of semiconductors that has constrained new vehicle supply and cascaded into wholesale and retail prices. Vehicle sales trends and pent-up demand (Priority: 4/5): The panel debated whether lost vehicle sales will return to trend. Mike argued that reduced driving during the pandemic and demographic factors mean the market may not fully recapture the pre-pandemic shortfall. Labor market indicators and JOLTS (Priority: 4/5): Ryan highlighted the quits rate and job openings as signs of an unusually tight labor market, while also noting that low survey response rates and pandemic distortions complicate interpretation. Bond market, rates, and inflation expectations (Priority: 3/5): Ryan focused on the 10-year Treasury yield falling despite a hot CPI, suggesting bond markets still believe inflation is largely transitory and the Fed will remain patient. Auto lending and credit quality (Priority: 3/5): Mike described auto lending as strong because borrowers are current, delinquencies are low, and lenders benefit from high collateral values, though future downside risk rises if vehicle prices fall sharply. EVs and autonomous vehicles (Priority: 4/5): The discussion ended with a forward-looking view on electric vehicles and driverless cars, with Mike expecting EV adoption to accelerate sharply and robo-taxis to emerge in some cities by 2030.

Key Arguments: Most of the CPI acceleration was concentrated in volatile reopening categories and vehicles, implying limited underlying inflation pressure. Used vehicle prices are being driven higher by a shortage of new cars caused by semiconductor constraints, not just by durable demand. The vehicle market is unlikely to fully regain the sales lost in recessions because fewer miles driven permanently reduce replacement demand. High quits and openings indicate an exceptionally strong labor market, but JOLTS data may be noisy because of low response rates. The 10-year Treasury yield staying low after hot CPI suggests bond markets still trust the Fed’s transitory-inflation narrative. Auto lenders are currently in a strong position, but loan losses could rise if used-car prices normalize quickly and borrowers face income disruptions. EV adoption is likely to accelerate rapidly if subsidies and policy support continue, potentially reaching 25%-30% of sales within 10 years. Driverless cars could become meaningful in the 2030s, but weather and operational complexity remain major obstacles.

Data Points: CPI monthly increase: 0.6% - May CPI came in hotter than expected, with much of the increase attributed to reopening and vehicle prices. Core CPI consensus / expectation: 0.4% - Consensus view discussed at the start of the inflation segment. Underlying CPI after stripping transitory effects: 0.2% monthly; about 2.4%-2.5% annualized - Ryan argued that excluding reopening and vehicle-related effects leaves inflation near target. Vehicle prices contribution to CPI: 0.3 percentage points - New and used vehicle prices accounted for roughly half of the monthly CPI increase. Reopening-related contribution to CPI: 0.1 percentage point - Airfares, lodging, rental cars, and admissions added to inflation as the economy reopened. Used vehicle prices year-over-year: 50% higher - Mike said vehicle prices were up 50% from a year earlier, reflecting demand and supply constraints. Used vehicle price forecast: -15% - Mike expected used-car prices to fall as supply returns, with weekly prices already peaking in late May. U.S. used vehicle inventory: 3 million vehicles - April inventory level cited as far below the 7 million available in April 2019. U.S. vehicle inventories in April 2019: 7 million vehicles - Used as pre-pandemic comparison for inventory tightness. SAAR vehicle sales in April 2021: 18.8 million - The monthly sales rate was the highest since 2005, driven by recovered demand and incentives. Last higher sales month before April 2021: July 2005 - Employee-discount promotion from the Big Three was cited as the last higher month. Pre-pandemic trend vehicle sales: 17 million units - Panel used this as a benchmark for normal annual vehicle sales. 2020 vehicle sales: 14.4 million units - Used to calculate potential pent-up demand after the pandemic shock. Vehicle sales lost versus trend: 2.6 million units - Simple gap between 14.4 million sales and 17 million trend. Sales impact from chip shortage: 770,000 sales - Mike estimated the shortage removed this many sales from 2021. Quits rate: 2.7% - Ryan highlighted this as the highest since the early 2000s in JOLTS data. Job openings: 9.3 million - May JOLTS openings were described as an all-time high. Jobless claims: 376,000 - Weekly claims fell from 385,000, continuing gradual improvement. 10-year Treasury yield: 1.46% - Ryan’s regularly followed market indicator, discussed in relation to inflation expectations and bond market beliefs. Copper price: $4.50 per pound - Mark’s regular indicator of global growth and inflation pressure. EV share of U.S. sales in 2021: Closer to 4% - Mike’s estimate for current U.S. EV penetration. EV share of global sales: Almost 5% - Mike cited this as evidence of broad EV momentum. Potential EV share in 10 years: 25%-30% - Conditional on subsidies and policy support. Auto loan market growth: 7% per year - Mike said lending volumes have been strong during the pandemic period. Work-from-home miles-driven lag: About 2.5 months - Mike said miles-driven data lag the broader economy by roughly this amount.

Pivotal Quotes: "I think the recent date is starting to say I'm a little low." — Mark Sandy: Mark acknowledged that his inflation forecast may be too low given recent data. "So, add up these two transitory factors: reopening the economy, auto issues, that's four-tenths of the six percent or 0.6 percent increase in the CPI was transitory." — Ryan Sweet: Ryan summarized the argument that most of the monthly inflation spike was temporary. "I don't think that we ever really come out of a recession where we regain all of those lost units from trend." — Mike Brisson: Mike explained why vehicle sales may not fully return to the pre-pandemic trend after recessions.

Implications: Listeners should expect near-term inflation and auto prices to stay noisy, but the panel sees much of the pressure fading as supply normalizes. For automakers, lenders, and buyers, the key risks are inventory tightness, future price declines, and policy-driven EV acceleration.