Two years after the U.S. suffered its worst inflation since the 1980s, with car prices skyrocketing after the coronavirus lockdown, the auto industry knows it will be a long and bumpy road back to normalcy. showing.
In 2021 and early 2022, global transportation problems, semiconductor shortages and factory closures, combined with strong demand, led to a significant increase in vehicle prices. Economists had hoped that repairs to supply chains and the Federal Reserve’s interest rate hikes would deter borrowers and ease prices.
Instead, new car prices have risen further. Domestic automakers are still producing fewer cars and focusing on more profitable luxury models. Used-car prices helped keep overall inflation down late last year, but rebounded in April as supply shortages and surges in demand collided.
Despite the state of emergency officially ending, the aftermath of the industry pandemic’s turmoil is reverberating across the economy, pushing the Fed’s fight to contain inflation as consumers continue to spend despite rising prices. indicates why it can be long-term.
“Inflation will not go down smoothly, and it will be a difficult process,” said Brelina Ursi, chief U.S. economist at T. Rowe Price. “There are so many idiosyncratic factors at work right now, some of which I think have to do with post-pandemic demand.”
It turns out that car prices have remained uncomfortably high. Used car prices have fallen quieter and less stable — more fashion than economists expected. And new car prices continue to rise this year as manufacturers try to maintain the profit margins established in 2021.
“The big question now is whether companies will start competing with each other on price,” Urchi asked.
But the automotive market is changing dramatically, so this is a difficult question to answer. To understand the situation, it helps to look at how the automotive industry used to work.
Pat Ryan, CEO of Copilot, an auto-shopping app that monitors prices at about 40,000 dealerships, said, “At the start of the pandemic, the driving force behind the auto industry was retailer revenue. The idea was that sex was constantly being squeezed by the internet.” .
Automakers were incentivized to produce more cars than market demand, clear inventories and compete with lower-cost imports. Dealers profited on sales volume and financing, so customers often complained of overage charges.
The factory was closed due to the spread of the new coronavirus. Semiconductors remained in short supply even after reopening. Manufacturers allocated chips to their highest-priced models (trucks and sport utility vehicles), offsetting lower sales with higher profits per sale. Ryan said the roughly 5 million cars that would normally have been produced never made it.
Dealers joined the movement, charging thousands of dollars more than list prices, especially as the stimulus package rolled out and consumers upgraded or bought new cars to escape the city. .a study A report by economist Michael Hublin released by the Bureau of Labor Statistics found that dealer price hikes accounted for 35% to 62% of total new-car consumer inflation from 2019 to 2022.
There was also a downside to the decline in sales volume. Dealers are still profitable on service packages many years after the car is delivered. But overall, “it was definitely the best time to be a car dealer,” Ryan said.
But it was the worst time for those who suddenly needed a car.
That’s where Pittsburgh’s Hayley Court found herself last summer. After getting tired of low-paying jobs on her farm and restaurants, she set up a house cleaning business at $25 an hour. When her 2005 Jeep Grand Cherokee broke down, she felt obliged to quickly find a replacement to carry cleaning supplies to each job and to attend school where she was pursuing a degree in counseling. I was.
At that point, the used car she found was thousands of dollars cheaper than the cheapest new car, so she opted for a 2022 base-model Toyota Corolla. Her loan payments are about $500 a month. Her insurance premiums are also higher, plus she costs $200. Including gas and maintenance, Mr. Court’s transportation costs are about the same as his rent, leaving him with nothing to save or entertain.
“I think the really bad things are the necessities,” said Cort, 29. “Food prices have gone up a bit, but housing, medical and car costs are pretty tough.”
The car price frenzy began to subside in late 2022 as more vehicles began to leave the assembly line. However, the supply is increasing only slowly. Automakers are reluctant to give up the benefits of scarcity and have started talking about having “discipline” in their production targets.
“Over the past two years, car dealers and automakers have realized that low-volume, high-priced models are actually very profitable models,” Richmond Fed President Tom Birkin said in an interview. .
“Experience with price increases and the ability to move prices around certainly broadens the horizons of a businessman’s options,” he said. “It’s attractive if you can do that.”
One way automakers tried to keep prices afloat was by giving up cheaper models like the Chevrolet Spark and Volkswagen Passat. Auto companies launched electric cars in response to federal subsidies, but they didn’t help bring prices down, starting with premium versions like the $42,995 Mustang Mach-E.
A supply constraint was also added. Fewer than usual generations of cars are typically ending their three-year leases. Those who leased a car in the spring of 2020 have an incentive to buy the car at a fixed price before everything got expensive.
On top of that, some car rental companies are leading dealer groups by aggressively replenishing vehicles that have been out of stock for several years. like sonic automotive Complain that you are losing the auction at the announcement of financial results.
“There are so many sources of used cars that have dried up in the last few years,” said Satyan Merchant, senior vice president of financial services at credit watchdog TransUnion. “And it all affects downstream.”
The Fed is slowing demand for things like cars and raising interest rates sharply to keep prices down. But during the adjustment period, it’s becoming more difficult for many Americans to afford a car. According to TransUnion, the average monthly payment for a new car rose from $585 two years ago to $736 in the first quarter of 2023. Used cars averaged $523 a month, and he increased by $110 over the same period.
Automobiles are now a polarized market. Demand for luxury cars continues to be strong, with wealthy buyers there. excess savings Users over the last two years can absorb higher interest rates or simply pay in cash. Some companies are only receiving premium prices for vehicles ordered in 2022.
There is also competition for low-end cars, as people on a tight budget and in face-to-face jobs can’t afford to give up the means of transportation that have become synonymous with cars in most parts of the country. intense. The job market remains strong, especially for face-to-face jobs in areas such as hospitality and healthcare, so more people have better places to work.
And many people in between are likely to switch cars every few years, waiting for prices to drop.
“What we’ve seen is the disappearance of the middle class,” said Scott Kneth, chief operating officer of Midwest Dealer Group. He blames automakers for abandoning cheaper, smaller, basic cars that people need just to get around, especially when interest rates keep luxury cars out of reach. . “It makes no sense to me at all.”
The situation may soon begin to resolve itself.wholesale car prices started to fall, and automakers offer even more incentives. Average prices for the past two months have fallen below the list, according to Kelly Blue Book data, a sign of softening demand, said Jonathan Smoke, chief economist at Cox Automotive. . Prices for electric vehicles, the fastest-growing segment of new-car sales, although a small percentage of the total market, have fallen in recent months.
However, recent history shows that price trajectories are rarely linear. Morgan Stanley auto industry analyst Adam Jonas said the only answer in the short to medium term is to increase inventories.
“According to the Japanese and Koreans, the tipping shortage is disappearing, but it will take months to replenish it,” he said. “Dealers need to prepare for a tough summer.”
Jack Ewing contributed to the report.
