Used Car Prices Continue to Rise

by: Calafia Beach Pundit

The ongoing rise in used car prices -- with temporary setbacks due to the trauma of recessions -- is remarkable, especially since so many seem to assume that the high level of unemployment and the tremendous amount of "resource slack" in the economy (GDP is running about 10% below its full-employment trend level, by my calculations) making inflation practically impossible and deflation something to worry about.

I remain convinced that inflation is a monetary phenomenon and has nothing to do with resource slack or the level of unemployment. What few prices there are that are declining -- mostly housing-related -- are simply proof that the economy is still in the process of shifting resources from one sector (e.g., construction and housing-related areas, where there was obvious over-building) to another (e.g., mining, which is booming these days because the global economy is expanding rapidly and monetary policies are accommodative).

That shift is signaled and driven by a comparable shift in relative prices. Housing prices decline, commodity prices rise; people leave the construction sector and move to the mining sector as a result. If car prices keep rising like this, pretty soon it will be obvious that there is a shortage of new cars being produced; look for more robust gains in new car sales and production in the months and years ahead.

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Disclosure: None