CPI, Cars, and Credit Conditions

Episode Summary

Executive Summary: The episode centered on easing inflation, especially in autos, and what it means for Fed policy and recession risk. The hosts and guests agreed CPI is moving in the right direction, with housing, services, and eventually vehicle prices expected to cool. Autos remain constrained by supply, sticky pricing, and tighter credit, while EV mandates, repair costs, and insurance are reshaping affordability and industry strategy.

Main Topics: Inflation is moderating, but speed matters (Priority: 5/5): The group agreed March CPI was encouraging: headline inflation slowed, energy and food cooled, and core inflation continued to drift lower. Debate focused on whether the pace is fast enough for the Fed to stop hiking or whether recession is still needed to fully restore price stability. New vehicle prices remain elevated due to MSRP mechanics and supply constraints (Priority: 5/5): Mike Brisson and Jonathan Smoke explained that new-car inflation is being driven by sticker-price dynamics, constrained inventory, richer product mix, and lingering supply issues in Japan, Germany, and parts of North America. Prices are expected to roll over later as incentives rise and inventories recover. Used vehicle prices are distorted by shortages and lagged retail pricing (Priority: 4/5): Wholesale and retail used-car prices are behaving differently because of inventory scarcity, delayed pass-through from auctions to retail, and seasonality. Guests expect peak used-car pricing to be behind us, but declines should be gradual because supply is still tight. Auto credit is tightening and affordability is becoming the binding constraint (Priority: 5/5): Credit availability, higher interest rates, widening spreads, and rising delinquency rates are making vehicle purchases harder to finance. The panel emphasized that the market may be shifting from a supply problem to a demand problem as more borrowers are priced out. Vehicle ownership costs are rising beyond purchase prices (Priority: 4/5): Insurance, repairs, and maintenance are increasing sharply, adding pressure to total cost of ownership. These costs may keep consumers in older cars longer, but they also raise the risk of future credit stress if repair bills force defaults. EV regulation, market adoption, and infrastructure challenges (Priority: 4/5): The EPA’s tougher emissions standards are pushing the industry toward electric vehicles, but the guests argued that affordability, charging infrastructure, battery supply chains, and regional grid capacity will determine whether the targets are realistic.

Key Arguments: March CPI was a strong report because inflation improved across most components, especially energy and food, and housing inflation is set to decelerate further as market rents feed through. Inflation has likely entered a three-phase slowdown: housing, core services, and goods/vehicles; all three are now moving in the disinflationary direction. New vehicle prices are still rising in BLS data because MSRP increases lag production cycles and because automakers have maintained pricing power amid inventory shortages. Used-car prices are constrained by the smaller post-pandemic vehicle pool, low fleet/lease volumes, and a long lag between wholesale and retail pricing. Auto demand is now increasingly limited by affordability and credit conditions rather than only by supply shortages. Delinquency rates are elevated, especially in auto finance and among borrowers who moved up the credit-score ladder during the pandemic. Insurance and repair inflation are making ownership more expensive and could eventually pressure defaults if vehicle prices soften. EV adoption is likely to rise, but reaching 50%-67% of sales will require lower battery costs, more charging infrastructure, consumer subsidies, and grid upgrades.

Data Points: Headline CPI (March): 0.1% month over month; 5.0% year over year - Chris and Mark discussed March inflation data as evidence that price growth is slowing. Core CPI (March): 0.4% month over month; 5.6% year over year - Core inflation remained elevated but continued to move down gradually. Energy prices in CPI: -3.5% month over month; -6.4% year over year - A major contributor to the softer CPI report. Food prices in CPI: 0.0% month over month - Food inflation flattened after being sticky for prior months. Peak CPI inflation: 9.0% year over year in June of last year - Used as the starting point for the disinflation narrative. Fed target for CPI equivalent: ~2.5% - Mark estimated CPI must fall to around 2.5% to align with the Fed’s 2% PCE target. New vehicle inventory: 1.8 million units - Jonathan said inventory has recovered from lows but remains far below pre-pandemic levels. New vehicle inventory low point: 1.1 million units - Lowest point during the supply crunch, compared with 2019 norms. Pre-pandemic new vehicle inventory: Over 3 million units - Historical comparison showing how constrained the market still is. New vehicle sales pace: 14.8 million SAAR last month; ~15.2 million average; 15.3 million forecast for 2023 - Conversation focused on whether sales are still depressed relative to the 17 million pre-pandemic norm. Pre-pandemic new vehicle sales pace: About 17 million SAAR - Referenced repeatedly as the old baseline for market demand. Used vehicle price statistic: -8.9% year over year - Chris’s statistics game referred to car rental prices in the CPI. Motor vehicle repair CPI: 17.4% year over year - Used as a striking example of rising ownership costs. Auto insurance statistic: 15% - Chris correctly guessed the statistic was vehicle insurance inflation. Consumer inflation expectations: 4.6% one-year expected inflation - Jonathan’s statistics-game pick from the University of Michigan survey. Super core inflation: 0.3% month over month; 3.8% six-month trend; 5.6% year over year - Mark used this to argue services inflation is also easing. Used-vehicle loan rate increase: Almost 90 basis points in March - Jonathan said used-car financing costs rose sharply as credit spreads widened. Subprime share of new vehicle loans: About 15% pre-pandemic; down to 5% last year - Used to illustrate how tighter underwriting is removing part of the demand base. Average subprime new vehicle loan rate: About 20% - Jonathan cited this as a major barrier to financing demand. Vehicle sales financed: Close to 60% of total U.S. vehicle sales - Showed how crucial credit is to the auto market. New vehicle sales financed: North of 80% - Illustrates the dependence of new-car demand on financing availability. Used vehicle sales financed: A little over 50% - Used-car market is also heavily credit dependent. Insurance bill anecdote: 20% increase - Mark cited his own sharp auto insurance cost increase as evidence of affordability pressure.

Pivotal Quotes: "Stay the course, baby." — Mark Zandi: Used as a metaphor for inflation policy: don’t introduce unnecessary new shocks while disinflation is underway. "The industry is replacing a supply problem with a demand problem." — Jonathan Smoke: Summed up the shift from shortages and inventories to affordability and credit constraints. "We do need to get there. This is a good way to get it through without all the backlash." — Mike Brisson: Commenting on EPA emissions rules and the push toward electric vehicles.

Implications: Inflation is easing, which supports a less aggressive Fed, but autos still face supply, credit, and affordability headwinds. Expect gradual price relief, slower sales, and continued pressure on consumers until financing, inventories, and EV economics improve.