This mid-September edition of the Auto Market Weekly Summary provides updates on consumer and producer inflation, consumer credit and auto credit availability. Energy prices are a key focus, with gasoline reaching $4.30 per gallon and diesel crossing $6 for the first time. Rising fuel costs are adding to inflationary pressure, while higher Treasury yields and the prospect of another Federal Reserve rate increase point to a more expensive borrowing environment for consumers and the auto market.

Bottom Line Up Front

Diesel prices crossing $6 per gallon for the first time is the story to watch, given how essential the fuel is to moving goods and vehicles around the country. The news arrived alongside an August inflation report showing producer prices accelerating to 5.4% year over year and consumer prices holding at 3.4%. In addition, Friday’s preliminary University of Michigan survey showed one-year inflation expectations rising to 4.6% from 4%. This forward-looking measure is watched closely by Federal Reserve officials, and it arrives at the wrong moment for anyone hoping the Federal Open Market Committee might hold rates steady this week.

Underneath those headlines, consumers are under strain as the Middle East conflict shows no resolution. Real wage growth has turned negative for five consecutive months, with inflation outpacing income gains by 0.3% year over year in August. The 10-year Treasury yield crossed 4.8% last week and is now holding just below 5%, a level that affects borrowing costs across the economy. Fed funds futures show an 86% probability of a rate increase this week, up from 59% a week earlier, making the case for holding rates increasingly difficult to defend, particularly as dissent within the Federal Open Market Committee has been rising. The stock market’s continued strength also supports the view that financial conditions remain loose, even as bond yields climb, adding to the pressure on the Fed to act.

For the auto market, the effect on consumer loans is beginning to bite. New-vehicle loan annual percentage rates have risen 35 basis points since July, and used-vehicle loan rates are up 11 basis points over the same period. The increases are not insurmountable, but they signal a more expensive financing environment ahead. The auto market has been one of the economy’s most resilient sectors this year, supported by the oldest vehicle fleet in history and a substantial backlog of pent-up demand. That structural support will not vanish overnight. But with diesel at record highs, real wages negative for five consecutive months and a rate increase appearing increasingly likely this week, consumer fatigue is a real risk. Auto loan rates are likely to follow Treasury yields higher, and financing costs may help determine whether the market’s resilience holds through year-end.

Credit Availability

Auto credit access rose for the fourth month in a row in August, with the Dealertrack Credit Availability Index climbing to its highest level since November 2015. The gain was widespread, with a rebound in subprime share driving most of the advance while a modest widening in the yield spread was the only offset.

  • Gains were broad-based, with noncaptive new-vehicle financing the only channel to decline and credit unions the only lender type to fall during the month.
  • Subprime share rose 20 basis points to 16.6%, its first increase in five months and the largest single contributor to the index. Negative equity, loan terms and approval rates all added support, with terms reaching an all-time high of 31.3% and approvals rising for a fifth consecutive month. The yield spread was the only drag, widening 4 basis points to 6.61%.
  • The subprime increase, though, came alongside a decline in subprime lending. Fewer subprime loans were written than in July, and the share rose only because total originations fell faster than subprime alone.
Consumer Price Inflation

Headline inflation rose in August, in line with recent expectations, as energy prices and shelter drove most of the increase. Seasonally adjusted prices for new and used vehicles moved higher, while vehicle insurance declined for the fourth consecutive month.

  • Overall consumer prices rose 0.4% month over month in August on a seasonally adjusted basis, with the year-over-year rate holding at 3.4%. Energy prices rose after declining for two months, and shelter costs increased 0.3% from July.
  • Energy prices rose 2.1% month over month, as gasoline increased 3.9% from July. Energy prices are now up 16% year over year, with gasoline prices 27.4% higher.
  • New-vehicle prices rose 0.3% month over month, accelerating from July’s 0.1% gain, and were up 0.6% year over year. Used-car and truck prices rose 0.4% from July.
  • Motor vehicle parts and equipment prices were unchanged for the month and up 0.9% year over year.
  • Vehicle insurance costs fell 0.8% month over month, the fourth consecutive monthly decline, and were down 5.1% year over year.
  • Core consumer prices rose 0.3% from July, more than expected, and were 2.4% higher than a year earlier.
Producer Price Inflation

Wholesale prices accelerated in August, with the increase driven almost entirely by a spike in energy prices. Diesel fuel alone rose 24% month over month and was nearly 78% higher than a year earlier on an unadjusted basis.

  • The producer price index for final demand rose 0.4% in August, up from a 0.1% increase in July, pushing the year-over-year rate to 5.4% from 4.8%.
  • Final demand goods prices jumped 1.1%, the sharpest monthly gain since May, with much of the increase attributable to a 4.2% rise in energy prices.
  • Core producer prices rose 0.3%, a slight step down from July’s 0.4% increase but consistent with the persistent price pressure seen since the conflict in the Middle East began earlier this year.
  • Final demand services prices rose 0.1% and were up 4.5% from a year earlier.
Consumer Credit

Consumer credit growth accelerated in July, though the composition of that growth shifted notably from June.

  • Consumer credit outstanding rose $18.1 billion in July, up from an upwardly revised $14.6 billion increase in June, initially reported as $14.2 billion, and well above May’s $2 billion gain.
  • Revolving credit grew at an annualized rate of 2.5% in July, a sharp slowdown from June’s 6.1% pace.
  • Nonrevolving credit, which includes auto and student loans, increased at an annualized rate of 4.8% in July, nearly double June’s 2.5% rate.