Karl and Cars

Episode Summary

Executive Summary: The episode centered on March inflation and retail sales, with a deep dive into autos as a major driver of recent CPI volatility. Guests argued used-vehicle prices are normalizing as supply constraints ease, while new-vehicle prices remain elevated due to low inventories and lingering supply-chain issues. The group concluded inflation is near a peak, but vehicle markets, credit, and Fed policy still point to a bumpy path ahead.

Main Topics: March CPI and the inflation peak (Priority: 5/5): The hosts reviewed the March CPI print, emphasizing that headline inflation remained extremely high but that core inflation slowed somewhat. They debated whether inflation has peaked and agreed it is likely near peak levels, driven largely by energy and commodity shocks tied to Russia’s invasion of Ukraine. Vehicle prices and auto-market inflation (Priority: 5/5): Jonathan Smoke explained that used-vehicle prices surged because of unprecedented supply shortages, then began normalizing in 2022. New-vehicle prices remain elevated because inventories are still far below normal, and dealer markups plus chip shortages continue to support high prices. Demand, supply, and pent-up auto sales (Priority: 5/5): The discussion distinguished between supply-driven and demand-driven weakness in auto sales. Participants argued that the pandemic, consumer preferences, housing migration, and fleet needs created pent-up demand, but production constraints and affordability are now limiting sales. Retail sales and consumer behavior (Priority: 4/5): Retail sales appeared healthy nominally, but much of the gain reflected higher prices rather than stronger real spending. The group noted that real retail sales have been largely flat for about a year and that consumers are shifting back toward services and in-store shopping. Auto credit, affordability, and loan trends (Priority: 4/5): The guests highlighted worsening affordability, rising auto-loan balances, and falling loan counts. Despite strong credit quality and loose standards, high vehicle prices and longer loan terms are beginning to suppress demand. Stagflation risk and Fed policy (Priority: 4/5): The conversation closed with a debate over stagflation. All agreed the 1970s-style outcome is unlikely, largely because the Fed is more willing to raise rates aggressively and accept recession risk to prevent inflation expectations from becoming entrenched.

Key Arguments: March CPI was hot, but much of the acceleration came from gas and energy-related pass-through effects rather than broad-based demand alone. Used-vehicle inflation is easing because the pandemic-era supply shock is fading; wholesale markets are reverting to normal depreciation behavior. New-vehicle prices remain high because inventory is still far below normal, so production, not demand alone, is the main bottleneck. Auto sales remain below pre-pandemic norms because supply is constrained, though there is still meaningful pent-up demand in retail and fleet channels. Real retail sales are weaker than nominal figures suggest because inflation is inflating dollar sales; consumption is shifting toward services. Auto credit quality remains solid even as balances rise, but longer loan terms and affordability strain are starting to weaken loan counts and lease penetration. A 1970s-style stagflation spiral is unlikely because the Fed has learned to prioritize inflation control and will tighten policy aggressively if needed.

Data Points: CPI headline inflation, month over month: 1.2% - March CPI increased sharply from February, signaling continued inflation pressure. CPI headline inflation, year over year: 8.5% - Highest annual CPI reading since December 1981. CPI core inflation, month over month: 0.3% - Core inflation slowed from February’s 0.5% pace. CPI core inflation, year over year: 6.5% - Still far above the Fed’s target and seen as too high. Gasoline prices in CPI: +18% - Gas was a major driver of March inflation, linked to Russia-Ukraine disruptions. Energy prices in CPI: +11% - Broad energy inflation accelerated from February’s 3.5%. Owner's equivalent rent: +0.4% m/m - Housing component continued to prop up inflation. Retail sales, March: +0.5% m/m - Nominal retail sales looked healthy but were partly price-driven. Retail sales, February revision: 0.8% from 0.3% - Upward revision improved the first-quarter GDP read-through. Gas station spending: +8.9% - A major contributor to nominal retail sales growth. New vehicle sales SAAR, March: 13.3 million - Still far below the pre-pandemic norm near 17 million. Average annual vehicle sales, pre-pandemic: 17.25 million - Five-year average before COVID disruptions. Average annual vehicle sales, since pandemic: 14.65 million - Shows lasting supply/constrained-demand impact. Used vehicle prices, full-year forecast: -3% - Jonathan Smoke expected wholesale used-vehicle prices to decline over 2022. Vehicle inventory on dealer lots: 1.1 million units - End-of-March inventory was still far below normal levels of about 4 million. Normal dealer inventory: ~4 million units - Typical inventory level for the same time of year. Auto affordability: ~43 weeks of income - Moody’s/Cox affordability index showed record or near-record strain. Auto delinquency rate: 2.5% - Still historically very strong, though up from pandemic lows. Loan balances growth: +7.6% y/y - Equifax-based auto finance balances continued rising. Auto finance account count: -1.3% y/y - Largest contraction since 2011, signaling weaker demand. Lease penetration: Lowest in more than a decade - Leases fell sharply because manufacturers and captive lenders faced supply and residual-risk issues. Average auto loan term: 70 months - Loan terms have lengthened as buyers stretch to afford higher prices. Tax refunds issued by IRS as of April 1: $204.4 billion - Refund timing was about four weeks behind normal, affecting seasonal spending patterns. Tax refunds vs. 2019: -4% - Refund issuance lagged the last normal year despite larger average refunds. Sticky-price CPI, year over year: 4.7% - Atlanta Fed measure showing slower-moving price categories remain elevated. Flexible-price CPI, year over year: 20% - Atlanta Fed measure capturing volatile items like gas. Used vehicle wholesale market seasonal note: Prices typically rise during tax refund season - Jonathan noted a recurring seasonal surge in spring auctions. Pent-up demand estimate: 3-4 million units - Jonathan’s estimate for combined retail and fleet demand delayed by the pandemic.

Pivotal Quotes: "I think we're close. Close. If not, already there." — Chris Dorides: On whether U.S. inflation has peaked after the March CPI report. "It takes an extraordinary imbalance of demand versus supply to take an asset that fundamentally is a depreciating asset and turn it into an appreciation asset." — Jonathan Smoke: Explaining why used-vehicle prices surged during the pandemic. "The Fed is. Well, the wild card here is some politicization of the Fed, right?" — Chris Dorides: Discussing why stagflation is unlikely unless policy priorities shift.

Implications: Listeners should expect inflation to ease only gradually, with autos no longer the main inflation shock but still a key swing factor. Supply constraints, credit strain, and Fed tightening keep recession risk elevated even as 1970s-style stagflation remains unlikely.