Auto Market Weekly Summary

Inflation decelerated, consumer credit growth accelerated, and consumer sentiment is rising on lower gas prices in the latest economic data available.

The Consumer Price Index (CPI) showed inflation decelerated in July. The year-over-year inflation rate was 8.5%, down from 9.1% in June. Many of the top-level categories saw declines in July, but food experienced a large 1% increase, and rent showed an accelerating increase.

Within the CPI, vehicles saw lower year-over-year inflation, with new vehicles slowing to 9.8% in July compared with 10.8% in June. Used vehicles slowed to 6.6% from 7.1% in June. With used-vehicle prices now declining, year-over-year used prices will end up being down later this year.

Consumer credit growth accelerated in June. Auto loan performance deteriorated in July, and auto defaults saw a sizable increase. However, even with that increase, the overall default rate remains low. Auto credit access tightened in July across all loan channels and lender types.

Consumer sentiment is up so far in August as gas prices continue to decline from the record levels in mid-June. However, consumers’ views of buying conditions for vehicles deteriorated.

Inflation off peak: The headline aggregate measure for inflation was unchanged on a seasonally adjusted basis, which was down substantially from the very high 1.3% monthly increase in June. The core CPI, which excludes Food and Energy, saw an increase of 0.3%, which was down substantially from the 0.7% increase in June.

Many of the top-level categories experienced declines in July including apparel, transportation, and education and communication. The biggest decliner was airline fares, which were down 7.5%. Food still saw a large 1% monthly increase, rents had an acceleration in increase to 0.7% from 0.6% in June, but fuel oil declined 10.9% and gasoline declined 7.7% after increasing 11.1% in June.

Vehicle prices moved in different directions in the CPI, finally reflecting what we have been seeing in the auto market, as new vehicles saw a 0.6% increase in July, but used vehicles saw a 0.5 decline. On a year-to-year basis, the core CPI was unchanged at 5.9%. Core CPI peaked in the year-over-year change at 6.5% in March. The overall CPI declined to 8.5% from a peak of 9.1% in June. The categories with the largest year-to-year increases in July were fuel oil (77%), gasoline (44%), eggs (33%) and airline fares (26%).

Within the CPI, vehicles saw lower year-over-year inflation, with new vehicles slowing to 9.8% versus 10.8% in June and used vehicles slowing to 6.6% from 7.1% in June. With used vehicle prices now declining, used prices will end up being down later this year compared with a year ago.

Borrowing grew: The Federal Reserve reported that Consumer Credit, excluding housing-related debt, grew by $40.15 billion in June. The increase was an acceleration from May and close to the record growth of a $47.09 billion increase in March.

The increase in June was driven primarily by growth in non-revolving debt, which includes auto loans and student loans. June’s $25.36 billion expansion of non-revolving debt was the largest in history. Other data reported by the Federal Reserve Bank of New York indicated that auto loan originations in the second quarter increased to $198.8 billion from $176.6 billion in the first quarter but were down from 2Q 2021’s record of $201.9 billion.

Auto loan performance worsens: Auto loan performance deteriorated in July as severe delinquencies and defaults both increased. Loans delinquent by 60 or more days increased 3.9% and were up 32.1% from a year ago. In July, 1.56% of auto loans were severely delinquent, which was an increase from 1.49% in June and the highest rate in five months. Compared to a year ago, the severe delinquency rate was 40 basis points higher.

In July, 6.19% of subprime loans were severely delinquent, which was an increase from 5.75% in June. The subprime severe delinquency rate was 183 basis points higher from a year ago, and the July rate was the highest in the data series back to 2006.

Even though subprime severe delinquencies are high, delinquencies are still not leading to pre-pandemic levels of defaults. However, defaults jumped in July, indicating that June’s decline was a data anomaly. Loan defaults increased 26.5% in July from June and were up 45.1% from a year ago. Even with the increase, the annualized auto loan default rate in July was 2.35%, which remains well below the 2.92% rate in July 2019.

Auto credit tightens: Auto credit access tightened in July. Our Dealertrack Auto Credit Total Loan Index declined 1.8%. Credit tightened across all loan channels and lender types in July with new-vehicle loans showing the most tightening and credit unions tightening the most across lenders.

Sentiment improves: The initial August reading on Consumer Sentiment from the University of Michigan increased 7% to 55.1. The increase was from improving future expectations as the view of current conditions declined. The main worry in the data was the expected inflation rate in five years increased to 3.0% from 2.9% in July, but consumers’ expectation of inflation over the next year fell to 5% from 5.2% in July.

Consumers’ views of buying conditions for vehicles declined as views of prices and interest rates both deteriorated. The only times consumers felt worse about auto loan interest rates was in 1980-1982 when rates were much higher.

The daily index of consumer sentiment from Morning Consult has increased 3.2% so far in August. The index has improved as gas prices have been falling. The average price of unleaded nationally was $3.98 last Thursday, down 21% from the peak in June.

Jonathan Smoke is chief economist at Cox Automotive.