Used car prices prompt Statistics Canada to follow inflation

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Statistics Canada has started tracking used vehicle inflation, thanks to changes in consumer behavior brought about by the pandemic.

As of June, the agency now includes used vehicle prices in the Consumer Price Index (CPI), which it uses to calculate inflation. Previously, Statistics Canada used new vehicle prices as a proxy for used vehicle prices when calculating the private transportation portion of the CPI.

Taylor Mitchell, senior CPI analyst at Statistics Canada, explained that the agency used this method because, although new vehicles tend to be more expensive than used vehicles, price changes in two categories generally mirror each other, rising and falling at roughly the same rate.

Since the CPI does not measure the true cost of things, but rather the rate of price change, this method worked as long as the price changes for new and used cars were aligned.

“There’s a whole universe of consumer prices and it’s just not possible for us to price everything,” Mitchell said, “so what we do is we choose products that can represent movement for other things that are in the same kind of product class.”

However, Mitchell said used vehicle prices began to diverge from new vehicle prices in the fall of 2020 amid the COVID-19 pandemic.

“We’ve started to see used car prices outpacing new car price growth and there are a number of reasons for that,” she said.

Mitchell said the pandemic has led to production constraints for new vehicles, including factory closures due to COVID-19 outbreaks and a slowdown in production of semiconductor chips, a critical component of modern cars. . With fewer new vehicles on the market, consumers have turned to the used vehicle market. As consumers filled their demand for new vehicles with used vehicles, demand outstripped supply and drove up the cost of used vehicles at a higher rate than new vehicles.

“So that really made adding used car prices to the CPI a much higher priority,” Mitchell said.

Mitchell’s team used the new CPI basket to calculate the May inflation rate and found that the CPI number for all items was the same with or without used vehicle prices. However, Mitchell said it was too early to tell what effect used car prices will have on headline inflation going forward.

“Over time we will have more information on how this affects the overall CPI and it will really depend on how used prices move versus new cars,” Mitchell said.

New and used vehicles in Canada from January 2020 to March 2022. (Source: Statistics Canada)

Moshe Lander, an economist at Concordia University in Montreal, believes Statistics Canada made the right choice in updating the CPI, based on the impact of the pandemic on consumer behavior.

“If the typical Canadian consumer starts changing what they buy, the shopping cart no longer reflects reality,” Lander said. “So the inclusion of used cars now is just a reflection of the fact that the typical Canadian consumer is not behaving the way they were a few years ago.”

The CPI basket change is permanent, meaning that Statistics Canada now has a mechanism to measure used car price increases separately from new car price increases, if car price changes new and used will diverge again in the future. In the meantime, Lander believes the current gap between new and used vehicle inflation will eventually correct.

“I think even though it’s inflationary and hurting consumers’ pockets, it’s the kind of thing that when things get back to normal, when it might be, that kind of pressure should probably go away,” Lander said.

USED ​​CAR PRICE OUTLOOK

Baris Akyurek, has been closely monitoring used vehicle prices throughout the pandemic. As Director of Marketing Intelligence at AutoTrader.ca, a Canadian online marketplace for new and used cars, Akyurek has access to vast amounts of used vehicle sales data.

Based on how used vehicle prices have risen since 2021, as well as signs of cooling in some regional markets, he thinks used car prices in Canada could be nearing their peak.

Akyurek said used vehicle prices are typically high in January and then gradually decline throughout the year. However, 2021 and 2022 bucked this trend.

“Month to month, [prices] have been steadily increasing since the start of 2021,” he said. At the start of 2020, the average price of a used vehicle in Canada was $27,029, according to data from AutoTrader. By early 2022, that price had risen to $36,562. Last month, the average price of a used vehicle in Canada was $38,097, a year-over-year increase of 34.5%.

“So looking at prices overall… it looks like we’re probably at the top or getting closer to the top at the national average level,” Akyurek said. “But if you look at the pockets of the country, we see some softening.”

Akyurek said Manitoba and Saskatchewan both saw modest month-over-month declines in used-vehicle prices in May, while British Columbia, Manitoba and Saskatchewan again recorded decreases in June. Akyurek attributes the declines to a few key factors, including a recovery in new-car production levels and an increase in used-car inventory.

“There are more cars on [AutoTrader.ca], and going back to the mismatch of supply and demand, it looks like prices have started to come down slightly,” Akyurek said. “We expect some kind of normalization in the near future.”

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