- Inflation hit a 40-year high but is nearing its peak.
- Auto loan performance deteriorated, returning to pre-pandemic levels.
- Consumers view car-buying conditions lowest since at least 1978.
COVID-19 cases driven by the Omicron variant are at record levels that are more than triple the peak previously hit last January. The pace of growth is slowing, but the virus, inflation, the weather and stock market volatility have weighed on consumer sentiment.
Inflation stood at its highest level in 40 years, but we may be nearing the peak of the year-over-year increase. Retail sales disappointed again in December as retail sales declined nearly 2% with most categories recording drops relative to November. The Omicron wave and earlier holiday purchases were the primary drivers of the decline. Even so, retail sales measured in dollars are up substantially from a year ago, thanks in part to inflation.
Consumer credit grew at an accelerating pace in November. Auto loan performance has normalized with the severe delinquency rate close to what it was before the pandemic began. Even so, credit eased again in December for auto loans.
Inflation hit record: Headline inflation decelerated in December but pushed inflation to the highest level in 40 years. The headline aggregate measure increased 0.5% on a seasonally adjusted basis from 0.8% in November. The core CPI, which excludes Food and Energy, accelerated to 0.6% from 0.5% in November.
Categories with the largest December increases in prices were jewelry and watches (+4.0%), used cars and trucks (+3.5%), women’s apparel (+2.6), and furniture and bedding (+2.0%). Rent growth decelerated to a 0.4% monthly increase, but that level of increase is still elevated.
On a year-to-year basis, the core CPI accelerated to 5.5% from 4.9% in November to reach the highest year-over-year increase since February 1991. The overall CPI accelerated to 7.0% from 6.8% in November to reach the highest year-to-year increase since June 1982. The categories with the largest year-over-year increases in December were gasoline (+50%), used cars (+37%), car rental (+36%), and lodging (+28%).
Retail sales weakened: Retail sales were weaker than expected in December, as the Omicron wave of COVID-19 and early holiday purchasing delivered disappointing sales for the month. The initial estimate showed a seasonally adjusted total decline of 1.9% when an increase of 0.3% was expected. This followed a weaker than expected and downwardly revised November result as well.
Purchases at vehicle dealers outperformed the market as sales excluding motor vehicles and parts declined 2.3% while sales of motor vehicles and parts declined 0.4%. Only miscellaneous stores (+1.8%), building material and garden equipment supplies stores (+0.9%), and health and personal care (+0.5%) bucked the declining trend. Retail sales at department stores (-7.0%), furniture and home furnishings stores (-5.5%), and sporting goods, hobby, book, and music stores (-4.3%) were the largest decliners.
Still, even after the decline, retail sales remain up over last year as retail sales were up 16.9% from a year ago. Compared to last year, no major category for retail sales was down. Retail sales are measured in dollars, so higher inflation plays a role in the increases being measured. The biggest year-over-year gainers were gas stations (+41%), food services and drinking places (+41%), and clothing (+29%).
Credit grew: The Federal Reserve reported that Consumer Credit excluding housing-related debt grew by $40 billion in November, which represented an acceleration of credit growth. Revolving credit (credit card balances) increased by $19.84 billion, which was up substantially from the $6.57 billion increase in October. Non-revolving debt (auto loans and student loans) increased by $20.15 billion, which was up from $9.44 billion.
Auto loan performance deteriorated again in December. With government support fading and loan accommodations falling, credit performance has been normalizing from historically low delinquencies and defaults earlier in the pandemic. 60-day-plus delinquencies increased in December for the seventh month in a row and were up 4.4% from a year ago.
In December, 1.45% of auto loans were severely delinquent, which was an increase from 1.36% in November and the highest severe delinquency rate since May 2020. Compared to a year ago, the severe delinquency rate was 5 basis points higher. In December, 5.48% of subprime loans were severely delinquent, which was an increase from 5.17% in November and the highest severe delinquency rate since February 2020. The subprime severe delinquency rate was 45 basis points higher from a year ago. Loan defaults declined 0.7% in December from November but were up 6.3% from a year ago. Auto credit access expanded in December. Our Dealertrack Credit Availability Index measured auto credit as looser in December compared to any month since March 2019.
Consumer sentiment fell: The initial January reading on Consumer Sentiment from the University of Michigan declined 2.5% to 68.8 from 70.6 in December. Consumers’ views of current conditions and future expectations both declined. Consumers saw buying conditions for vehicles decline to the lowest level registered by the survey back to 1978. Buying conditions for homes improved to the highest level in eight months.
The daily measure of consumer sentiment from Morning Consult declined slightly this week leaving a modest 0.4% increase thus far in January. Rising COVID-19 cases, inflation, winter weather and a weaker stock market are weighing on consumer attitudes.
The next Auto Market Report video will be published on Smoke on Cars on Wednesday, January 19.