Car prices will remain elevated for the foreseeable future due to the fractured global supply chain, an increase in the number of high-end vehicles, a decrease in the number of affordable vehicles, and the lingering effects of rampant inflation.
Car prices have become increasingly elevated in recent years. The causes for the continual price hikes are multi-layered and stem from problems related to the supply chain, rampant inflation, and lingering post-pandemic side effects. However, both the public and professional expectation has been that car prices would eventually start to subside, but unfortunately, that is likely no longer the case.
At present, the average cost of a new vehicle is hovering near $50,000. Although, in many cases, sale prices can exceed $80,000, especially if one is in the market for a new SUV or crossover vehicle. Car prices over in the used car market are not much better either, with the average cost hovering near $30,000, per data collected by Kelley Blue Book.
To put those prices into perspective, if one were to finance $30,000 at a zero percent interest rate over the course of five years, the monthly payment would come out to approximately $500. With inflation soaring, the cost-of-living skyrocketing, and consumer budgets being more strained than ever, a $500 per month car payment is just not realistic for many individuals and families.
Thus the pertinent question remains if the economy and individuals alike are being choked by inflation and other mitigating factors, how is it that car prices are still so elevated? According to a report detailed by NPR, it comes down to a few issues.
First and foremost, despite notable improvements, the global supply chain is still very much under duress. The pandemic caused semiconductor production to tank after many facilities were forced to shutter due to the pandemic. Most facilities are now, once again, operational, but true recovery will likely take years due to the size and scale of the auto industry.
Furthermore, those vast disruptions to semiconductor production ignited a chain reaction that caused the supply of cars nationwide to dip tremendously, creating a deficit of available vehicles. This deficit came at a time when cash was rapidly flowing in the US due to a series of government stimulus packages. The influx of cash drove demand for vehicles higher, but there was a serious lack of supply, which is what initially drove prices through the roof.
Those initial deficits are still percolating and, thus, are serving to keep car prices high. Additionally, when it comes down to it, car companies are businesses that want to, above all else, protect their profit margins. Hence, when faced with a shortage of supplies, they will look to see how they can still generate an acceptable level of revenue. Car companies’ answer to this dilemma was to hone in on producing more expensive models.
This maneuver drastically shrunk the number of affordable vehicles on the market and automatically drove the average price of vehicles higher. With semiconductor supply still suffering, this issue has yet to be rectified. And now, with the prices of new cars untouchable to many, it (logically) drove individuals to the used car market, elevating prices in that market in accordance with increased demand.
Moreover, the used cars that will be infused into the market in the coming years will be the ones that were produced during the height of the pandemic, meaning that the expensive models of today will become the used cars of tomorrow. All of these factors compounded together have created the perfect circumstances to keep car prices elevated for the foreseeable future.
Alas, it isn’t all doom and gloom, though. Car producers in the US have invested in building more domestic semiconductor facilities in case the global supply chain is negatively impacted in the future. This will ensure that parts will still be readily available even in times of crisis, meaning that car prices would be more likely to stay stable. Additionally, on the electric vehicle side of the industry, competition between companies is heating up.
Increased competition could serve to drive prices, at least for EVs, to more realistic levels for the average person or family. Unfortunately, though, while these solutions may provide some solace for the future, the reality now is that car prices are still high, and it’s going to stay that way for a while.