At the start of the year, new and used car prices were soaring. Nobody had ever heard of a 40% inflation rate for used cars, yet an acute shortage of semiconductors threw the car market into disarray. With chip shortages severely depressing new-car production, consumers with plenty of cash shopped used instead. So prices skyrocketed.
With the chip shortage easing, car prices are falling back to earth. The year-over-year change in new cars peaked at 13.2% in April and has now dropped to 8.4%, as the first chart below shows. Used-car inflation has dropped from 41.2% in February to a mere 2%. Rental car inflation, 39.1% a year ago, is actually negative, with prices falling 3.5% during the last 12 months.
All of this is welcome evidence that some of the forces causing high inflation this year are moderating. Overall inflation peaked at 9% in June — a new 40-year high — and has dipped bit-by-bit to 7.7%. Markets, finally, sense tangible progress in the war on inflation. Stocks roared after the report for October showed a half-point decline in the inflation rate, on hopes that the Federal Reserve may be able to slow its aggressive pace of interest rate hikes.
Other inflation categories reveal where hotspots still exist. Energy has been another broad driver of inflation, for two reasons. Energy markets were tight, with prices rising, before Russia invaded Ukraine. After Russia invaded, markets got tighter still and prices shot up even more. Nine months into the war, energy producers and consumers have adjusted and markets have stabilized. But there’s an energy war between Russia and the West that parallels the military war in Ukraine, and it’s not close to over. New disruptions could occur in December when a European ban on Russian oil purchases goes into effect, along with a US-led plan to impose price caps on Russian oil sales.
For now, lower world oil prices have brought gasoline inflation down, as the second chart shows. Gas-price inflation went from 60% in June, when pump prices hit $5 per gallon for the first time, to 17.5% in October. Household energy costs have improved slightly, from a 21.9% inflation rate in June to 17.1% in October. While the trend is going in the right direction, nobody can be happy about any important commodity that’s up by double-digits. High energy costs are one thing that could make it hard for the Fed to get inflation down to its preferred target range of around 2%.
The third chart, showing inflation in rent, groceries and transportation, looks more stable, with no wild price swings. But this chart generally reflects bad news because essentials that families spend much of their budget on have gone up by more than wages. The annual inflation rate is 7.5% for rent, 12.4% for food and 11.2% for transportation. Wages are only growing by 4.7% per year. With the cost of essentials higher, and staying there, many families are falling behind.
Meanwhile, there’s very little deflation: Almost nothing is coming down in price. Declining inflation rates still represent price increases on top of earlier price increases. Gas prices, for instance, are now around $3.90, which is up from about $3.50 a year earlier. The November 2021 price was up from $2.20 a year earlier. The inflation rate from 2021 to 2022 is lower than the inflation rate from 2020 to 2021. But the net cost to consumers is still considerably higher. This could change in coming months, as a slowing economy, weakening demand and steadily improving supply chains generate year-over-year price declines. That will be a stronger sign that inflation is abating.
The fourth chart shows travel costs, which are worth looking at because they generally reflect money people choose to spend, but don’t necessarily have to. Year-over-year airfare inflation is stratospheric, at 42.9%, because fuel costs are pushing costs up and consumers—eager to move around after the COVID shutdowns—don’t mind paying. That’s arguably good news because it shows some consumers have plenty of money to spend on nonessentials.
Hotel and rental car costs are returning to normal, after post-COVID inflationary spikes. Again, rental-car inflation has disappeared. Hotel-room inflation fell from 25.1% in March to 5.9% in October. That’s a sign that problems with supplies, labor shortages and other things affecting the travel industry are improving. Everybody wants this to happen faster, but at least it’s happening.