Used car prices are not usually expected to rise all that much. While each year’s crop of ‘new’ used cars is better than the one before, they are always going to be second best. There are many advantages to buying new cars that make getting the latest used car a questionable financial decision.
These advantages include the newest features, higher resale value, better fuel consumption, as well as warranties and service plans. Extended car warranty providers will give you a warranty on a used car, but not as much is covered as with a new car.
Nonetheless, inflation on used cars at the start of 2022 was at a staggering 40%. There is no mystery to this figure, as shocking as it may sound. An acute semiconductor shortage led to delayed production of new cars, creating a surge in demand for used cars. This was on top of all the other factors causing inflation, in general, this year.
But things have returned to a relative state of normalcy, with the increased supply of semiconductors. Inflation on used cars is now at just 2%. Is the rest of the automotive market following suit?
New Car Inflation in 2022
New cars and used cars exist in very different economic contexts. While used car prices are largely based on supply and demand, new cars are priced by manufacturers. A surge in demand or a lack of supply (or both) affects the price of new cars, but there is always a ceiling.
For this reason, in contrast to the 40% rise in the price of used cars, new cars saw only a 13.2% hike at its peak. In the same vein, the massive drop in inflation we’ve seen with used cars is not reflected in new cars. The year-on-year change in new car prices is still at 8.4%.
The question is how much further it will drop, if at all. There is no clear-cut answer to this question, but there are factors we can look at for clues.
As we’ve mentioned, the semiconductor shortage is no longer as vast as it was at the start of 2022. New cars are being produced at a much higher rate. But production shortages are far from over. Semiconductors are still in short supply when compared to demand. Experts expect car production shortages to last throughout 2023.
In this context, the inflation’s sharp drop in the used car market may not be entirely due to more supply. Greater supply has definitely made a difference, but demand has likely gone down as well, with people struggling to make money in this economy.
This is also a factor in the dip in inflation when it comes to new cars. Consumers simply cannot afford to buy new cars at current rates. If manufacturers raised rates much more, demand would slip even further.
Deflation is Non-Existent
There is also evidence that inflation on new cars will not drop much further because of what we are seeing elsewhere. While inflation is not as high as it was a few months ago, deflation is almost entirely non-existent. Even in those industries in which inflation has mostly disappeared, it is still positive.
The only exceptions are in the rental car industry and in IT hardware and services. Prices in the rental car industry are tangentially related to the cost of new and used cars but don’t necessarily correlate. As such, they don’t tell us much about what we can expect from new car prices.
Global Supply-Chain Issues
One thing that is clear is that global supply-chain issues are going nowhere. The supply chain is recovering after the shock of Russia’s invasion of Ukraine, but it has a long way to go before it recovers to where it was at the start of the year. It has an even longer journey if it is to reach pre-pandemic normalcy.
Production will always be a major factor in the price of new cars and so we are unlikely to see deflation in the industry in the near future if we ever do. That said, things are getting better and we can hope for slightly lower rates of inflation as we approach 2023.