What’s the Deal with Car Prices?

If you tried to buy a used car recently, you probably had sticker shock.  The prices are A LOT higher than they were even a year ago.  In fact, in June, prices for used cars and trucks were up 45% from a year earlier, according to the Bureau of Labor Statistics.  Why the dramatic increase?  There are several factors to consider. 

Covid-19: The most obvious reason that can be attributed to the increase in car prices is the pandemic. In the subsequent months after the initial wave of covid-19, the was a mass exodus from cities as many people searched for homes in the suburbs. This coupled with the fact that people were avoiding public transportation at all costs led to the initial increase in demand. As with most norms, the pandemic changed the way we interact and travel causing these prices to stay elevated for an extended period of time.

Semiconductors: As I write this, semiconductors are down for the fourth straight day and have experienced this type of volatility for months. Semiconductors have made headlines repeatedly and have been the center of blame during earnings calls. Many companies with a variety of products that are reliant on these chips, have revised their outlook due to the shortage in the market. When it comes to cars, many car companies cut their demand for these chips when the first lockdown hit only to realize an increase in demand in the months to follow. This had a ripple affect across supply chains causing production of new cars to lag behind the spike in demand. With fewer new cars being produced, car buyers started to turn to used inventory.

Inflation: The term that rattles markets as the Federal Reserve bases many of their decisions like when to rollback their stimulus measures, has been directly linked to used car prices. In June, used car prices rose 10.2% and the Fed has stated that nearly one third of all inflation is correlated to the surge in car prices. The Fed has also stated that these prices are transitory and will not persist once market conditions begin to normalize. Some fear that the federal reserve is underestimating the transitory nature of these prices, and that with the abundance of liquidity from government stimulus prices will stay elevated from some time.

Seasonality: Similar to2009, at the end of the Great Recession, the automobile industry has not seen typical seasonality patterns. Starting during the spring until the peak in June, followed by a larger than average decline in summer months prices have not followed trends from previous years. The prices of 2-6 year old vehicles coming off recent momentum are now starting to stabilize around 25% above where they started the year (see figure 1 below). In addition to prices being at record highs, listing volume for used cars is down 15% due to lack of trade ins and lease returns (see figure 2 below).

Given the several factors that contribute to why car prices are at these levels, it will be interesting to see how long these prices can remain where they are. They are a focal point in the inflation debate which influences monetary policy and the economy as a whole.

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