Elon Musk Is Worried About Deflation, That's Good News for Car Buyers

A couple of days ago, Elon Musk said that a Federal Reserve (Fed) prime loan rate increase would risk sending the U.S. economy into a deflationary period. ARK Invest CEO Cathie Wood agreed with him and said the signs for major price reductions are already here. Now, after the Consumer Price Index (CPI) data has been updated, Tesla’s CEO came back to this topic and argued the Fed should decrease the prime loan rate by 0.25% or, as the financial gurus say, 25 basis points (BPS).

They’re worried. Not just the two aforementioned CEOs, but most of those people that run businesses that rely upon consumers’ spending habits. Plus, investors in the stock market and other parties share the same concerns. If there’s no growth and no promise for any returns on investments, then why throw money at the stock market, right?

This is all happening because the CPI data revealed two very important aspects – the inflation rate has come down to 8.3% thanks mostly to lowering gas prices, but the core inflation (which excludes the food and energy sector) accelerated to 6.3% in August from 5.9% in July. And that got everyone looking at the financial markets worried because the Federal Open Market Committee Meeting (FOMC) is scheduled for next week. That’s when a new prime loan rate increase (also known as a rate hike) might be announced.

Federal Reserve Chair Jerome Powell made it clear on multiple occasions that he wants inflation under control, and he might intentionally slow down the economy by doing just that.

Another rate hike would slow down spending, borrowing, and lending even more. Essentially, the U.S. economy could enter a slow period in which people won’t depart with their dollars as easier as before. For example, Americans won’t rush to buy houses by indebting themselves anymore.

Careful tiptoeing

That’s how deflation happens. The demand lowers, while supply grows. Eventually, things will have to balance themselves out and businesses that can’t adapt will most likely fail. This means pricing will once again get competitive and corporations will try to find new ways to get the consumer’s money.

Experts agree that deflation is a bad sign for an economy that’s preparing to enter a volatile period that usually ends with a recession. The purchasing power increases, but goods and services don’t get to know any growth. This leads to lower salaries and production cuts.

But that’s what the Fed is supposed to do! Things took a turn for the worst in 2022 when gas reached a price of over $5 a gallon nationally, and dealerships decided to just charge customers a lot over the manufacturer's suggested retail price (MSRP) with unreasonable price hikes dressed as market adjustments. The housing market was also incredibly hot for a while. Sellers aren’t receiving as many offers as before, according to what realtors post on social media and what experts say.

That’s because the dollar is getting stronger with these rate hikes and cash is once again king in the U.S., after a period in which almost everyone agreed there was too much securities purchasing done by the Fed only to increase the cash reserves of commercial banks – a process that’s also known as “money printing.”

Fortunately, things are a little bit different now and it might be the sign awaited by many Americans who wanted a new car or desired to take a trip to Europe.

It won’t be easy

Because deflation is, after all, a potential threat to the U.S. economy, the Fed will have to move strategically. A rate hike now would keep inflation under control and would change how businesses operate, but it can’t go on for a long time. It has to be a temporary measure. Otherwise, slashing profits might change the plans of many manufacturers and other important industry participants.

Knowing all this and looking at the fact that Tesla is slashing its delivery times by a couple of months, there’s room only for good news – EV buyers that want a car made by the American brand could soon get them at a discount.

Tesla has ramped up production and Elon Musk is actively trying to change how Tesla Service operates. All they have to do now is improve their quality check department to make sure cars will reach customers without major defects.

While the production rate remains high, Tesla will find itself with many cars waiting for their owners. To clear the stock, they’ll most likely have to offer some incentives once again. For example, they might give up on the Apple-like strategy of not making the mobile connector charger standard. Remember when we talked about this in June?

But people will think twice before spending $65,990 on a Model Y Long Range. It’s going to be hard to argue for such an expensive acquisition when employers will be complaining about shrinking profits. Workers will think more about their jobs and their families' basic needs. They’ll put job security first and everything else second.

Musk might be aware that this scenario could happen soon. Last time he had "a super bad feeling about the economy" prices went up. Now that's not the case anymore. The CEO wants the Fed to lower the prime loan rate because he'd like to continue with the current macroeconomic scenario. But it won’t happen. After the FOMC meeting next week, we’ll know what the Fed decides to do and how badly it wants inflation to come down.

Finally, one thing’s for sure – discounts for new models will come and, as a direct effect, the used car market will also react with lower prices. What remains to be seen is exactly how cheaper will cars get in two, or three months.

Drop 0.25%

— Elon Musk (@elonmusk) September 14, 2022