Here’s why car prices are so high and why it matters

The CPI hit a 13-year high in May, with prices up 5% from the previous year. But about a third of that increase was due solely to used car prices.

Used car prices soared 30% in the 12 months to May, just below the record one-year increase in used car prices reported in 1975.

According to Edmunds, a go-to resource for car information, the average price for used cars hit $ 26,500 in June, up 27% from a year ago, while the average transaction price of new cars is $ 41,000, up 5%, virtually the same as the average sticker price of $ 41,500.

Record prices for new and used cars is more than a nuisance: it is an economic problem that weighs heavily on household budgets. About 40% of U.S. households will make one car purchase every year, and this year there could be even more due to pent-up demand for delayed purchases in 2020.

Why used car prices are rising

Car prices have increased for a variety of reasons, but they all boiled down to two factors: high demand and limited supplies.

Used car prices are particularly hard hit as car rental companies, facing a virtual halt in demand last year, sold around a third of their fleets to raise enough cash to survive the pandemic . This sales rush last spring pushed used car prices down slightly, which explains the large percentage increases in the 12-month comparison.
But with the current rebound in travel, car rental companies are suddenly faced with a shortage of cars to rent and not sell what they have even as demand for cars has skyrocketed. Millions of people have found jobs this year, and millions more who worked from home are returning to the office, fueling the need for vehicles.

And many buyers are making purchases they planned to make last year but delayed due to the uncertainty surrounding the pandemic. New car sales to US consumers set a record breaking 7 million vehicles in the first half of the year, according to JD Power.

Record prices for new cars are also a factor leading some buyers who would prefer new cars to turn to used cars instead.

Why are new car prices rising

New car prices are also on the rise due to a severe shortage of computer chips. Dealer inventories have fallen to historically low levels.

Lack of new car inventory is another reason car rental companies can’t buy the replacement cars they want and hang on to their existing fleets.

Another factor driving the average car price up is the desire of car buyers for more expensive trucks and SUVs, rather than cheaper sedans. Consumers also want more expensive features, such as automatic braking and lane departure warnings, which also raise prices.

Rising inflation

New and used car prices normally make up around 7% of the CPI, but they usually don’t move the numbers much because they don’t experience sharp price swings, said Jonathan Smoke, chief economist at Cox. Automotive.

“Used car prices typically increase by around 1% per year,” he said. “It certainly contributes a lot more to inflation right now.”

Rising prices for new and used cars are an important part of reading inflation, given how much Americans spend on cars each year – over $ 600 billion a year, Smoke said.

He and other economists believe this is a temporary spike and that as prices stabilize the cost of used cars will start to drop later this year.

“I am not saying that there is going to be a correction,” he said. “But we seem to overcome the imbalance that created the frenzy this spring.”

This is why the Federal Reserve should not brake to fight high inflation: it will start to retreat on its own, said Mark Zandi, chief economist at Moody’s Analytics.

“It would be a policy error if the Federal Reserve took its foot off the monetary accelerator because of these inflation figures,” he said. “It’s transient. It’s not going to last. It’ll fall back to earth pretty quickly.”

About Alma Ackerman

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