When Will Car Prices Fall in Light of Inflation and the Automotive Industry?

Like the pricing of many other consumer goods, car prices have risen sharply in recent months. Data analytics show that in July 2022, the average selling price of a new car in the United States was 11.8% more than the same month the previous year. Rising borrowing rates, together with the skyrocketing price of gasoline, are making automobile ownership less appealing and slowing sales.


This analysis investigates the factors driving vehicle costs, the inflation’s effect on car sales trends, and the forecast for when prices will begin to fall.


Why Are Auto Costs Increasing?


Problems in the global auto supply chain have led to price increases. The automotive industry is experiencing a supply deficit due to the persistent semiconductor shortage. The situation between Russia and Ukraine is adding to the upward pressure on car prices caused by rising raw material costs.


Consumers in the United States spent a record-breaking $45,869 on a new car in July 2022, according to industry data. We estimate that the passing on of higher input costs, such as raw material prices, accounts for half of the increase in pricing for new automobiles. Research shows that the yearly growth rate of the weighted average cost of raw materials needed to create a new vehicle reached 116% in 2021. The prices of lithium, nickel, and cobalt, all of which are used in electric car batteries, have skyrocketed, causing a disproportionate impact on the cost of electric vehicles.


As a result of chip shortages, automakers are prioritizing the production of their most expensive vehicles, leading to a “forced mix-up” of market segments and a subsequent rise in average transaction prices. Why would automakers put chips in $25,000 vehicles instead of $85,000 automobiles if automakers don’t have enough semiconductors and if semiconductors were interchangeable, as they are to some extent?


The COVID-19-caused supply-and-demand mismatch in the automotive industry has been exacerbated by these problems in the supply chain. On U.S. dealer lots at the end of every month, more than 3.5 million vehicles are idle. Due to manufacturing closures caused by the pandemic, this number dropped to 2.7 million before the chip crisis even began. However, demand remained high throughout COVID-19 because many people were still eager and able to buy brand-new automobiles thanks to epidemic stimulus checks and stockpiles of personal savings.


The used car market is also feeling the effects of rising prices.  A  purchasing app for used cars reports that Americans pay an extra $10,046 on average for a pre-owned vehicle compared to what they would pay if market forces and conventional wisdom were at play. U.S. Bureau reports for June 2022 reveal that the price of a used car was up 7.1% from the same month the previous year.


There is a type of feedback loop between the prices of used vehicles and the pricing of new vehicles.” Since new cars are in short supply, rising demand for older vehicles has led to a significant increase in their purchase prices. Furthermore, with fewer new cars on the road, there will be fewer used cars available for trade-in, which will drive up prices. Changes in commodity prices have an effect on the scrap value of both new and used automobiles.


When Will Car Costs Decrease?


Used automobile prices appear to have peaked in early 2022 and are now beginning to decline as the market cools. However, due to ongoing inflationary pressures, new car prices are not expected to fall in 2022.


Inflation is still a major issue in the production chain for new cars. While the price of raw materials may be down, suppliers still face high non-commodity costs that they must pass on to the automotive industry as a whole.


Further, the aftermath of the chip scarcity will be felt for some time to come. Because of the requirement to replenish stock, wholesale demand will compete with retail demand to set a floor on the cost of brand-new automobiles. It’s possible that new car prices might go up by 2.5% or down by 2.5% between now and the end of 2022, though I lean toward the former scenario.


Used car sales are up. As new automobile manufacturing increases, used car demand should decline. The Used Vehicle Value Index recorded a peak of 236.3 in January 2022 and fell to 219.6 in July 2022. Some consumers in the U.K. are selling their cars due to increased gas prices and tight budgets, boosting supply. According to the U.K.’s Office for National Statistics, prices for used automobiles declined 2.5% in June 2022.


The epidemic and its aftermath will prolong the auto industry’s “lower volume, higher price” dynamic. While industrial conditions may normalize in the second half of the year and several commodity prices have reversed, earnings reports so far this season suggest the road to recovery may be less quick and less linear than predicted. A probable economic slump in 2023 could accelerate volume growth and price normalization.


Frequently asked questions


What is meant by the automotive industry?


The automotive industry encompasses companies that are involved in the production, sale, and maintenance of automobiles.


What is the future of the automotive industry?


While it is anticipated that overall global vehicle sales will rise through 2030, the annual growth rate will drop from 3.6 percent over the previous five years to roughly 2 percent. The primary factors for this drop will be macroeconomic factors as well as the expansion of cutting-edge mobility services like e-hailing and vehicle sharing.


Will car prices drop in 2022 in the USA?


Used car prices have started to drop as the market slows down after appearing to peak in early 2022. On the other hand, prices for new cars are not projected to fall in 2022 because of persistent inflationary pressures. “Significant inflation is still occurring in the new automobile supply chain.

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