A supply crunch has led to an unprecedented spike in used car prices, causing the market's preferred measure of inflation to climb to its highest level since 2008.

These historically high prices are expected to persist, economists say, and could continue to have an outsized influence on inflation expectations. The increases, which helped push the consumer price index up 5% in May 2021 from May 2020, may also spur the Federal Reserve to consider easing its ultraloose monetary policy, put in place in order to lessen the economic blow of the pandemic.

A decline in new car production due to pandemic shutdowns and a global semiconductor shortage have driven the average cost of a 2019 Dodge Challenger, for example, to about $39,000, up 42% from the same time a year ago, according to CarGurus, which tracks used and new vehicle sales.

Sales of all used Challengers have jumped to an average sales price of about $34,200, up 37% in a year. Overall, the average sales price of all used cars and trucks has jumped to $26,550, up 31% year over year, CarGurus estimates.

Record growth in used car prices will likely continue, albeit at a slower rate than previous months' spikes, said Michelle Krebs, executive analyst at Autotrader.

"We anticipate strong demand for used cars at least through fall, but it has, as it always does, dipped from spring highs," Krebs added.

Tax refunds drive demand for used cars in normal years, and stimulus checks are further fueling car buying in 2021, Krebs said. But that jump in demand is starting to taper.

Still, economists expect high prices of used vehicles to continue.

"I don't think there is any immediate fix to the vehicle supply-side problems," said Paul Ashworth, chief North America economist with Capital Economics. "Manufacturers now expect semiconductor shortages to persist until well into next year, which will weigh on new vehicle production."

A Biden administration review of supply chains for semiconductors and three other critical sectors has yielded a 250-page review that includes about 90 detailed recommendations, but experts do not expect the chip shortage to abate until at least 2022.

The worst of the auto production slowdown should be in the second quarter of 2021, according to Morningstar analyst David Whiston. However, automakers will have an easy time selling any new cars that hit dealers' lots since supply is so low, Whiston said.

That imbalance has contributed to inflation gains. On June 10, the U.S. Bureau of Labor Statistics reported that the consumer price index, the market's preferred inflation metric, rose 0.6% from April to May and 5% year over year.

Much of this increase, the bureau pointed out, was due to skyrocketing prices for used vehicles. The index for prices for used cars and trucks climbed 7.3% from April to May, and 29.7% from May 2020 to May 2021. It marked the largest year-over-year increase in used vehicle prices in 45 years.

The extreme jump in used vehicle prices skewed the overall inflation increase, accounting for one-third of the rise in consumer prices, the bureau said.

Transitory inflation

The outsized impact used car and truck prices had on the index may bolster the Federal Reserve's argument that the ongoing rise in inflation is transitory, said Greg Daco, chief U.S. economist with Oxford Economics.

"You have to be careful not to exclude everything from inflation because prices are rising and that is affecting how people behave," Daco said. "But in the grand scheme of things, some of these swings in prices are undoubtedly transitory."

U.S. airfares, which have risen 24% from May 2020 to May 2021, and hotel room rates, which have risen about 9% year over year, will likely flatten out as demand wanes after the summer, Daco said.

Shannon Seery, an economist with Wells Fargo, said the sharp jump in prices of used cars was certainly intensifying inflation expectations.

Still, Seery said there were signs that longer-lasting price pressure could be building. The cost of shelter, which makes up about one-third of the consumer price index, has jumped 2.2% from May 2020 to May 2021.

The price of used vehicles is about one-third higher than pre-pandemic forecasts, Seery said. This would likely make sizable price gains unlikely going forward even if supply remains constrained.

"It's difficult to know when the transitory-price increases are going to subside," Seery said. "But we are confident such large price gains won't persist for too long."

Months to go

In addition to a drop in new vehicle production, the used car price surge is also impacted by consumers who are more hesitant to use public transportation while the pandemic persists, said Daniil Manaekov, an economic forecaster at the University of Michigan.

"What this means is we got a strong contribution to inflation on the way up as the shortage developed and as people decided they need vehicles as the economy cranks back up, and they don't want to be commuting on public transport," Manaekov said.

Some experts expect new car production to improve by the third quarter, Manaekov said. By the fall, there will probably be fairly optimistic demand projections, and automakers will have ordered sufficient amounts of chips.

"Once the chip shortage relaxes, the new side of the vehicle market will probably be able to crank out more [cars]," Manaekov said.

Prices in the used market could grow to a point that hits demand if the market has not already reached that point, said Daco of Oxford Economics. Consumers may then shift back to buying new cars, lowering demand and potentially prices in the used market.

"We should be ready for wild swings the other way too," Daco said.