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Econ 919 — Used car prices help drive up inflation

Photo: Sabine Poux/KDLL

In 2020, your dollar would go further than it will today.

The used-car market reflects that shift and is probably the greatest current marker of inflation — a drop in the purchasing power of each dollar marked by rises in prices. 

At a used car dealership in Soldotna, Midway Auto manager William Brewer buys his own inventory from sites like Dealers Auto Auction of Alaska, where a car that might have cost $14,000 in 2020 is now $18,500. 

Auto dealers around Alaska are dealing with much of the same.

“We pretty much shop for cars at the same place,” Brewer said. “I get to converse with a lot of the other dealers. And they’re struggling as well to try to find inventory at an affordable rate.”

Brewer sells the cars on his lot for about 35 percent more than he was before.

Alaska experiences inflation most years. But according to the state’s Department of Labor and Workforce Development, last year was at a 30-year-high.

Costs for goods and services increased about 5 percent, more or less on par with the national average. Alaska consumers are seeing higher price tags on everything from food (4.8 percent higher) to clothing (3.9 percent) to used cars (28.5 percent).

Neal Fried knows about those high prices for cars all too well.

“I’ve been looking for a used car and I waited too long because I’m a cheap economist,” he said. 

A state economist based in Anchorage, Fried tracks how inflation affectsAlaska.

“I’ve been doing this for a long time,” he said. “I was here when we had 10, 12, 14 percent inflation in the 1980s. But this is very different in many ways.”

He said a couple factors help explain last year’s spike. 

For one, people’s purchasing behavior changed. The economy started to bounce back in 2021, industries opened up again and people started spending more. Demand for many goods went up.

At the same time, problems riddled the supply chain. So even when companies were selling, they often couldn’t get the parts or products they needed to restock. 

Fried said he finds that supply chain mess really interesting economically.

“That’s just never happened before, at least in my lifetime,” he said. “Maybe in World War II it happened.”

Inflation can have a self-fulfilling element, too. 

“Our first big example of that was actually during COVID, was the toilet paper caper,” he said. “Whenever people at least think there might be a supply shortage, and they start buying like crazy, that’s going to affect prices.”

The numbers for 2021 are especially stark when compared to the 2020 deflation, when prices were largely down for consumers. Alaska saw deflation of just over 1 percent that year.

The consumer price index measures the average change in what buyers are paying for goods. Technically, that data is gathered in the Anchorage area. But Fried said the same applies throughout the state.

“Inflation is not determined locally for the most part. It’s a national and international trend," he said.

Fried said to predict where inflation will head next is a fool’s errand.

But he hopes the rate of inflation goes down in 2022. He said inflation creates economic uncertainty – and that is not good for the economy.

Back at Midway Auto, the manager, Brewer, said he’s doing OK on inventory for now. It’s not one of his busy seasons quite yet. 

But he anticipates challenges during busy times, like summer.

“It’s a lot harder for us to get the cars we need and keep them on stock, because in the summertime, we have a lot of rentals,” Brewer said. “We need reliable cars for that, and it’s harder to get those and keep them until the summer time.”

There’s an axiom in the car world that a vehicle loses value the second it leaves the lot. That rule of thumb might need an update in the age of high inflation.

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