Based on the latest data from Kelley Blue Book and Cox Automotive, the average price of a new car is now a touch over $ 45 000.00, up from $ 40 000 at the end of last year, and, according to CNN, $ 38 000 in May 2020. New car prices have now risen every month for the past six months due to supply chain issues regarding computer chips and other auto parts. Although demand did increase at the end of the first pandemic lockdown, this was just temporary.
Between August and September this year, new car sales dropped by around 7.3%
The drop in sales is an indication of the impact of a backlog in the micro-chip and car parts manufacturing industries created by the COVID pandemic. KBB’s data suggests that current automobile retail prices are being driven by demand for a limited inventory of pickups, midsize SUVs, and luxury cars. Therefore, the average price of cars is somewhat skewed. In fact, premium vehicles accounted for 16.6% of total car sales last month. The average price of a premium or luxury vehicle is around $ 60 800 hence the inflation in the average car price. Still, limited supply across the board has led to higher prices for those in the car buying process.
With limited supply and steep transaction prices, dealers are not incentivizing motorists to buy. It’s a “take it or leave it” scenario. Dealers are not being drawn into haggling. The likes of cash-back deals have been taken off the table and accessories are not being included as part of the deal. Market data shows a decrease in dealer incentive spending to a record low of 5.2%, in contrast to spending 10% on incentives a year ago. Dealers need to make up for their losses when they were forced to close and are being forced to recoup those losses using their limited supply.
An increase in demand after months and months of quarantine and lockdown has clashed with the limited inventory. New car prices have spiked nearly 12% year on year. Now that we have all become accustomed to the pandemic and its impact on both our working and home lives, something of a sense of normality is returning to the economy. The more positive sentiment is driving demand beginning to increase. However, with a backlog in chip and parts production, dealers are unable to meet the demand. In turn, dealers resort to boosting prices to turn a profit, as opposed to relying on selling volume.
There is still cheap money to be had. Spending on credit is driving demand. Consequently, inflation is rising, as suppliers compete for limited resources to meet the increasing demand. Simply put, cars and everything else is now more expensive to produce. The NPR has determined that consumer prices over the last twelve months have risen by 5%. That is the biggest jump in consumer pricing since the 4.8% jump in August 2008. Limited supply and inflation are like a double-edged sword for new car prices from a consumer point of view.
The current upward trajectory of inflation will put banks under pressure to raise the cost of lending when the Fed ups the cost of their borrowing in an effort to curtail inflation. This will squeeze financially marginal new car buyers out of the new car market. This is true even though the market and the economy are showing signs of recovering. Because chip shortage and auto part supply chain issues are working themselves out, all signs point to supply improvement.
According to the Consumer Price Index (CPI) used car prices have surged by 21% between April 2020 and April 2021. The lack of new car inventory and the accompanying price increases, along with creeping inflation, has had a major impact on the used car market. Demand has outstripped supply and the owners of older cars are electing to hold onto them, or are opting to sell them privately. As a result, used car dealers have very little to sell. When looking for a used car, you may not get what you want, and if you do, odds are it will come at a high price. For now, it is very much a seller’s market.