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Used car price update

Over time, one would expect the average selling price of used cars to climb in line with inflation and in line with new car prices. As this chart shows, that is indeed the case, if your time horizon is sufficiently long. Notable exceptions to this occurred in the early 2000s, and then in 2008. The first period was one in which the economy was feeling the after-effects of very tight monetary policy from 1996-2001. Tight money had led to declining commodity prices, declining gold prices, and a very strong dollar. Weak used car prices were reflecting deflationary pressures that were showing up in a lot of asset markets. The second period was dominated by the sudden collapse in confidence and spending that in turn was the fallout from the financial crisis. Prices fell because demand collapsed.

 The significant rise in prices over the past year reflect that 1) the effects of the financial crisis have largely passed, 2) demand is coming back, and 3) there is no sign here of any asset price deflation. Markets continue to obsess over deflation risks, yet here is yet another example of how prices are rising. The folks at Manheim have some commentary on the specifics of the used car market here.

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