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Used-Car Prices Aren’t Soaring Anymore. What It Means for Inflation.

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Used-car prices are up 45% from a year ago.
Jim Watson/AFP via Getty Images

Used-car prices have held steady for a month. Not only was that good for the buyers, but maybe for anyone else now in the market for a used car–or for that matter, just about anything.

The Manheim used vehicle pricing index, a well-respected gauge owned by Cox Automotive, was 236.3 in January, essentially flat from December but up 45% from a year ago. The index posted four big consecutive monthly gains beginning in September–from 194.5 to 236.2. January was the first sign in nearly two years that things are cooling off.

The run-up in used-car values has been nothing short of jaw dropping, and high vehicle prices–for both new and used vehicles–have helped fuel the hot inflation that Americans are dealing with.

Investors might feel a little differently, however. Falling prices might be a headwind for several stocks that had terrific runs in 2021.

The flat number “is not a scene changer, but I suppose it fits the view that durable goods price inflation is about to become a less extreme irritant and may even at some point deliver a significant disinflationary pulse,” wrote Gerard MacDonell, 22V Research senior managing director, in a Monday email to clients.

Any sign that inflation is abating would buoy the market. The Consumer Price Index rose at 7% year over year in December. Inflation hasn’t been that high since the 1980s, and soaring prices are the reason investors expect the Federal Reserve to raise interest rates several times in 2022. Higher rates–besides theoretically cooling off the economy–weigh on valuation multiples.

The inflation-interest rate connection is a big reason why the S&P 500 is down 3.3% year to date and the Nasdaq Composite Index has fallen 10%.

The January inflation number, from the Bureau of Labor Statistics, comes out Thursday.

Most investors would breathe a sigh of relief for if the number is lower, but flat or falling used-car prices could hinder auto dealer and lender stocks, which ripped higher in 2021 as pricing rose.

Shares of AutoNation (ticker: AN), CarMax (KMX) and lender Ally Financial (ALLY), for instance, rose 67%, 38%, and 34%, respectively in 2021. Rising prices helped, pushing up profit margins and limiting any potential credit-related losses on leased vehicles.

Investors seem to realize that 2021 might have been a special case for the car industry, though. The price-to-earnings ratios of all three stocks have fallen dramatically even as the stocks have climbed. A year ago, Ally stock traded at roughly nine times estimates next year’s earnings. Now it trades for about six times. AutoNation ‘s PE multiple went to roughly six times from 12 times. CarMax shares traded for roughly 23 times estimated earnings early in 2021. Now they trade for about 12 times.

All auto-related stocks react to new- and used-car pricing to some extent. But there are many fundamental issues that affect a stock’s, or a sector’s, performance. For car makers and auto parts suppliers, falling prices might be offset with rising production.

A semiconductor shortage held down auto production throughout 2021. Roughly 18 million light vehicles were manufactured globally in the fourth quarter, 3 million or four million fewer than what could have been sold.

The chip shortage is projected to ease gradually over the course of the year. Higher production should eventually lead to lower vehicle prices and help generate part of that deflationary pulse that MacDonell, and investors, are looking for.

Car buyers won’t complain either.

Write to Al Root at allen.root@dowjones.com

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