There's a 'mystery' in the September inflation report

Amid a tumbling stock market, Thursday’s subdued Consumer Price Index reading came as an unexpected pleasant surprise.

Core CPI, a barometer for underlying U.S. inflation, rose just 0.1% month-over-month in September, coming in short of expectations of 0.2%. The gains were even more muted year-over-year, pulling back to a 2.3% pace of increase in September after August’s 2.7% advance.

Some economists are pointing to the drop in used car prices as the culprit for weak core CPI. The segment posted the largest month-over-month seasonally adjusted decrease in the index, falling 3% on the month, or the largest drop in 15 years.

There’s something off about used car price data. (Flickr: Paul Sableman)

“The used car market is projected to see continued ramp up in supply from off-lease vehicles, and coupled with waning auto demand the risk is for deflationary pressures to persist,” Bank of America Merrill Lynch analysts wrote in a note. “That said, given the magnitude of the move in September, some payback seems likely in October. There may also be a near-term boost in demand following the recent hurricanes.”

“A bit of a mystery”

But data from Manheim, the world’s largest wholesale auto auction company, says otherwise. Manheim’s latest used vehicle value index – which tends to presage the CPI’s reading – showed that wholesale used vehicle prices increased 0.14% month-over-month in September and 3.7% year-over-year to a new record high.

The data from Manheim suggests “a continued solid rise in used car prices over the next couple of months,” Jeremy Nalewaik of Morgan Stanley wrote in a note. “The rapid increase in the Manheim index did moderate in September, but the index has tended to lead the CPI for used cars, even accounting for the recent change in BLS methodology that shortened that lead time. So the plunge in the CPI is a bit of a mystery.”

The Department of Labor’s Consumer Price Index showed used car prices falling on the month, starkly contrasting with the increases in prices seen in Manheim’s Used Vehicle Value index.

This is the second consecutive month that a downside surprise in CPI was concentrated within a specific category of goods. In August, apparel led declines, with prices falling 1.6% month-over-month.

The Department of Labor notes on its website that “Manheim Auto Auctions constructs a price index based on sales at their wholesale auto auctions that are only open to professional buyers. Manheim runs a chain of these auctions and has thousands of vehicles to use as source data. Note that they do not do adjustments for depreciation or quality changes and its index comes out monthly.”

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Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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