Statistics Canada has started tracking used vehicle inflation, thanks to changes in consumer behavior fueled by the pandemic.
As of June, the agency now includes used car 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 transport share of the CPI.
Taylor Mitchell, Senior CPI Analyst at Statistics Canada, explained that the agency used this method because while new vehicles tend to be more expensive than used ones, price changes in both categories generally mirror each other, going up and down. at roughly the same rate.
Since the CPI does not measure the actual cost of things, but rather the rate of price change, this method worked as long as the price changes on new and used cars were aligned.
“There’s a whole universe of consumer pricing and it’s just not feasible for us to price everything,” Mitchell said, “so what we do is we pick products that can represent the movement of other things that are in the same kind of class of product. “
However, Mitchell said used vehicle prices began to differ from new vehicle prices in the fall of 2020 amid the COVID-19 pandemic.
“We are starting to see used car prices outpacing new car price growth and there are some reasons for that,” he said.
Mitchell said the pandemic has led to limitations on new vehicle production, including plant closures due to COVID-19 outbreaks and a slowdown in the production of semiconductor chips, a vital component in modern cars. With fewer new vehicles on the market, consumers turned to the used car market. As consumers filled their demand for new vehicles with used vehicles, demand outstripped supply and caused the cost of used vehicles to rise at a higher rate than new vehicles.
“So that really made adding used car prices to the CPI much more of a priority,” Mitchell said.
Mitchell’s team used the new IPC basket to calculate May inflation rate, and found that the CPI number for all items was the same with or without used car prices. However, Mitchell said it’s too early to say what effect used car prices will have on overall inflation going forward.
“As time goes on, we’ll get more information on how it’s affecting the CPI for all items and really that will depend on how used car prices go compared to new cars,” Mitchell said.
Moshe Lander, an economist at Montreal’s Concordia University, believes Statistics Canada made the right decision in updating the CPI, based on how the pandemic has affected consumer behavior.
“If the typical Canadian consumer starts to change what they buy, the basket no longer reflects reality,” Lander said. “So the inclusion of used cars now is simply a reflection that the typical Canadian consumer is not behaving the way they were a couple of years ago.”
The CPI basket change is permanent, which means that Statistics Canada now has a mechanism to measure used car price increases separately from new car price increases, in the event that car price changes new and used diverge again in the future. In the meantime, Lander believes the current gap between new and used vehicle inflation will begin to correct itself eventually.
“I think that while it’s inflationary and it’s taking a toll on consumers’ pocketbooks, it’s the kind of thing that, when things get back to normal, whatever it is, this kind of pressure should probably go away,” Lander said.
OUTLOOK ON USED CAR PRICES
Baris Akyurek, has been closely monitoring used vehicle prices during the pandemic. As director of marketing intelligence at AutoTrader.caA Canadian online marketplace for new and used cars, Akyurek has access to a wealth of data on used vehicle sales.
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 have bucked that trend.
“Month after month, [prices] they have been rising non-stop since the beginning of 2021,” he said. At the beginning of 2020, the median 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. As of last month, the average price of a used vehicle in Canada is $38,097, an increase of 34.5 percent year over year.
“So looking at prices overall… it looks like we’re probably at or near the peak of the national average level,” Akyurek said. “But if you look at the pockets of the country, we’re seeing some softening.”
Akyurek said Manitoba and Saskatchewan saw a slight decline in month-on-month used vehicle prices in May, while British Columbia, Manitoba and Saskatchewan saw declines again in June. Akyurek attributes these 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 in [AutoTrader.ca], and going back to the mismatch of supply and demand, it seems that prices have started to go down slightly”, Akyurek. “We expect some sort of normalization in the near future.”