Why Is Inflation So Stubborn? Cars Are Part of the Answer. (2023)


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Prices of new and used vehicles were supposed to recede quickly as supply chain problems dissipated. The market had other ideas.

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Why Is Inflation So Stubborn? Cars Are Part of the Answer. (1)

By Lydia DePillis and Jeanna Smialek

‌Car prices soared after the coronavirus lockdowns, and two years into the United States’ worst inflationary episode since the 1980s, the industry demonstrates that getting back to normal will be a long and lurching ride.

In 2021 and early 2022, global shipping problems, a semiconductor shortage and factory shutdowns coincided with strong demand to push vehicle prices sharply higher. Economists had hoped that prices might ease as supply chains healed and the Federal Reserve’s interest rate increases deterred borrowers.

Instead, prices for new cars have risen further. Domestic automakers are still producing fewer cars and focusing on more profitable luxury models. Used car prices helped to lower overall inflation late last year, but rebounded in April as short supply collided with a surge in demand.

Echoes from the industry’s pandemic disruptions are reverberating through the economy even though the emergency has formally ended, and illustrate why the Fed’s fight to quash inflation could be a long one as consumers continued spending despite higher prices.

A Wild Ride for Car Prices

Used car prices have been volatile, while new car costs have continued to climb, adding to overall inflation.

“Inflation is not going to be a smooth path downward — there are going to be bumps along the road,” said Blerina Uruci, chief U.S. economist at T. Rowe Price. “There are so many idiosyncratic factors at play right now, and I think some of that has to do with demand post-pandemic.”

Elevated car prices have proved uncomfortably sticky. Used car prices have declined, but in a more muted — and volatile — fashion than economists had anticipated. And new cars have continued to get more expensive this year as manufacturers strive to maintain the margins established in 2021.

“The big question now is: Are companies going to start competing with one another on price?” Ms. Uruci asked.

But that’s a difficult question to answer, because the automotive market has drastically changed. To understand the situation, it’s useful to examine how the auto industry worked before.

“Going into the pandemic, the dynamic in the automobile business was this idea that retail profitability was under constant pressure, driven by the internet,” said Pat Ryan, the chief executive of CoPilot, a car shopping app that monitors prices across about 40,000 dealerships.

Automakers produced more cars than the marketplace demanded, offering incentives to clear inventory and compete with lower-cost imports. Dealers made their profits on volume and financing, often resulting in customer complaints of excess fees.

As the coronavirus spread, factories shut down. Even when they reopened, semiconductors remained scarce. Manufacturers allocated chips to their highest-priced models — trucks and sport utility vehicles — offsetting lower volume with higher profits on each sale. About five million cars that normally would have been produced never were, Mr. Ryan said.

Dealers got in on the action, charging thousands of dollars above list price — especially as stimulus programs rolled out, and consumers sought to upgrade their vehicles or buy new ones to escape cities. A study by the economist Michael Havlin, published by the Bureau of Labor Statistics, found that dealer markups accounted for 35 percent to 62 percent of total new-vehicle consumer inflation from 2019 to 2022.

There were downsides to the lower sales volumes; dealerships also make money on service packages years after cars drive off the lot. But on balance, “it was the best of times for car dealers, for sure,” Mr. Ryan said.

It was the worst of times, however, for anyone who suddenly needed a car.


That’s the position that Hailey Cote of Pittsburgh found herself in last summer. After tiring of low-wage jobs on farms and in restaurants, she built a business cleaning houses for $25 an hour. When her 2005 Jeep Grand Cherokee broke down, she knew she had to find a replacement quickly to ferry cleaning gear to each job and get to school, where she’s pursuing a degree in counseling.

At that point, the used cars she could find were only a few thousand dollars less than the cheapest new cars, so she went with a 2022 base model Toyota Corolla. Her loan payment is about $500 a month. Insurance, which has also become more expensive, is another $200. Including gas and maintenance, Ms. Cote’s transportation cost is almost as much as her rent, leaving nothing for savings or recreation.

“I think it’s the basic necessities that are really the worst,” Ms. Cote, 29, said. “Food’s gone up a bit, but the cost of housing, health care and cars is pretty brutal.”

The car price frenzy began to ease in the second half of 2022, as more vehicles started rolling off assembly lines. But the supply has risen only gradually. Automakers, loath to relinquish profits enabled by scarcity, started talking about exercising “discipline” in their production targets.

“During this two-year period, auto dealers and auto manufacturers discovered that a low-volume, higher-price model was actually a very profitable model,” Tom Barkin, the president of the Federal Reserve Bank of Richmond, said in an interview.

Car Dealers Reap Big Profits in Inflation Era

Car companies have been increasing prices by more than their input costs have climbed, leading to big profits on new vehicles.

Percent markups for publicly traded dealerships

“The experience of higher prices, and the ability to move prices, does broaden the perspectives of business people in terms of what their options are,” he said. “It’s attractive if you can do it.”

One way the automakers tried to buoy prices was jettisoning cheaper models, like the Chevrolet Spark and Volkswagen Passat. Responding to federal subsidies, car companies rolled out electric vehicles, but that didn’t help to bring prices down — they started with luxury versions, like the $42,995 Mustang Mach-E.

And there have been added supply constraints. The generation of cars that would typically be coming off three-year leases is smaller than usual. Those who leased cars in the spring of 2020 have an incentive to buy them at the prices that were locked in before everything became more expensive.

On top of that, some rental car companies are aggressively restocking their fleets after being starved for several years, leading dealership groups like Sonic Automotive to complain on earnings calls that they’re being outcompeted at auctions.

“There are so many sources of used vehicles that just dried up over the last few years,” said Satyan Merchant, a senior vice president for financial services at TransUnion, a credit monitoring company. “And it all has this downstream effect.”

The Fed has been raising interest rates sharply to slow demand — including for cars — and cool price increases. But during the adjustment period, that is making it even tougher for many Americans to afford a vehicle. According to TransUnion, the average monthly payment for a new car rose to $736 in the first quarter of 2023, from $585 two years before. Used cars average $523 per month, up $110 over the same period.

Prices for Cars of All Ages Are Above Prepandemic Levels

A new car will run you about $51,000 on average – about 30 percent more than in January 2020.

Cars are now a bifurcated market: Demand remains strong on the high end, where wealthy buyers with excess savings from the past two-plus years are able to absorb higher interest rates, or simply pay cash. Some are only now receiving vehicles they ordered in 2022 at inflated prices.

Competition for vehicles is also fierce on the low end, since people with thin financial cushions and in-person jobs can’t afford to forgo transportation, which in most of the country is synonymous with a car. The job market has remained strong, especially for in-person jobs in fields like hospitality and health care, so more people have workplaces to get to.

And many people in between, who might switch cars every few years, are waiting for prices to fall.

“What we’ve seen is the disappearance of the middle,” said Scott Kunes, chief operating officer of a dealership group in the Midwest. He faults the automakers for abandoning cheaper, smaller, basic cars that people need just to get around, especially as interest rates put fancier versions beyond reach. “It doesn’t make any sense to me at all.”

The situation may start to resolve itself soon. Wholesale car prices have begun to fall, and carmakers are offering more incentives. Kelley Blue Book data shows that average prices have fallen below list for the past two months, which Jonathan Smoke, chief economist at Cox Automotive, said signaled that demand was easing. Prices have come down in recent months for electric cars — the fastest-growing segment of new car sales, though a small portion of the overall market.

Recent history has shown, however, that pricing trajectories are rarely linear. Adam Jonas, an auto industry analyst with Morgan Stanley, said that over the short to medium term, more inventory was the only answer.

“Even though the statements from the Japanese and the Koreans are that the chip shortage is ending, it takes many months to spool it up,” he said. “Dealers should prepare for a tight summer.”

Jack Ewing contributed reporting.

A correction was made on

May 22, 2023


Because of incorrect data, an earlier version of a graphic with this article misstated the percentage markups for publicly traded dealerships in the fourth quarter of 2022. The percentage markup for AutoNation was 12 percent, not 13.2 percent; for Asbury, the markup was 12 percent, not 11 percent; for Group 1 Auto, the percentage markup was 11.1 percent, not 12.5 percent; for Lithia, the markup was12.5 percent, not 14 percent; and for Sonic, the percentage markup was 11.7 percent, not 13.4 percent.

How we handle corrections

Lydia DePillis is a reporter on the Business desk who covers the changing American economy and what it means for peoples’ lives. @lydiadepillis

Jeanna Smialek writes about the Federal Reserve and the economy for The Times. She previously covered economics at Bloomberg News. @jeannasmialek

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Why Is Inflation So Stubborn? Cars Are Part of the Answer.? ›

Why is inflation so stubborn? Cars are part of the answer. In 2021 and early 2022, global shipping problems, a semiconductor shortage and factory shutdowns coincided with strong demand to push vehicle prices sharply higher.

Are cars affected by inflation? ›

Used vehicle prices have increasingly become a barometer for inflation since early last year when the Biden administration blamed the market for rising inflation rates. Last month the consumer price index rose 0.4%, pushed higher by rising prices for housing, used vehicles and gasoline.

What happens to cars during inflation? ›

Inflation impacts most aspects of everyday life, including making car ownership more expensive. Increases in the cost to own a car are seen in multiple facets, including sticker prices, refueling costs, maintenance and car insurance premiums.

Why are cars so expensive right now 2023? ›

There has been a car shortage largely because of the semiconductor shortage. This shortage hiked up car prices because so few cars could be produced, and fewer were hitting the market than there were in pre-pandemic times.

Why is the car market so bad right now? ›

Automakers still lack sufficient computer chips to produce enough vehicles to meet demand, a lingering consequence of pandemic-related supply shortages. Sales of new vehicles last year were about 3 million below normal levels. Fewer new-car sales mean fewer trade-ins, which mean fewer used vehicles for sale.

Should I buy a car now or wait until 2023? ›

Americans planning to shop for a new car in 2023 might find slightly better prices than during the past two years, though auto industry analysts say it is likely better to wait until the fall. Since mid-2021, car buyers have been frustrated by rising prices, skimpy selection and long waits for deliveries.

Will car prices go down in 2023? ›

There is good news on the horizon in 2023, however. J.P. Morgan estimates that prices for both new and used vehicles are set to decrease as supply chain issues abate and inflation is poised to keep easing. Per the financial firm, new vehicle prices are slated to go down 2.5-5% while used cars may go down by 10-20%.

Should I buy a car during inflation? ›

Don't be afraid to buy a car during an inflationary economy

However, there are some advantages to shopping in an inflationary economy as well. For example, interest rates on loans are typically lower in an inflationary economy, which can make it a good time to buy a car.

Why is inflation so stubborn? ›

Part of the reason why inflation has been stubborn and may take some time to bring down is due to the insensitivity of demand to interest rates for products that have experienced the greatest price increases.

How long will vehicle inflation last? ›

In the U.S., the Manheim Used Vehicle Value Index — which measures the prices dealerships pay for used cars at auctions — hit a high of 257.7 in January 2022 and has since fallen to 222.5 in January 2023. Overall, J.P. Morgan Research predicts used car prices will decline by roughly 10% in 2023.

Will car prices go back down? ›

But they warn that prices won't be nearly as low as they were pre-pandemic. Prices skyrocketed during the pandemic, and remained high, due to supply-chain disruptions and a shortage of semiconductor chips, which power cars and more. But now, experts predict that changing conditions in the market will drive prices down.

How much longer will cars be overpriced? ›

For this reason, it may be best to hold out for as long as possible before shopping for a new used car. As inventory slowly continues to level back out, so will prices. In the past, Clark has predicted that the market would gradually improve throughout 2023, and now we're finally starting to see some lower prices.

What is the most common car in America? ›

Most Popular Cars in America
  • Most Popular Cars in the USA in 2022. ...
  • Toyota Corolla. ...
  • Ford F-Series. ...
  • Volkswagen Golf. ...
  • Volkswagen Beetle. ...
  • Ford Escort. ...
  • Honda Civic. ...
  • Ford Model T.

Which brand of vehicle is the most reliable? ›

What is the most dependable car brand? Here are the brand rankings based on the number of problems per 100 vehicles, according to J.D. Power's 2023 U.S. vehicle dependability study. The industry average is 186. The highest-ranking premium brand was Lexus, and Kia was the highest-ranking mass market brand.

Will the car market ever recover? ›

Although used car prices are finally starting to decline, it could be years before the market returns to a pre-pandemic normal.

Is now the best time to buy a car? ›

End of the year, month and model year

In terms of the best time of the year, October, November and December are safe bets. Car dealerships have sales quotas, which typically break down into yearly, quarterly and monthly sales goals. All three goals begin to come together late in the year.

What is the projection for car sales in 2023? ›

New-vehicle retail sales for April 2023 are expected to increase when compared with April 2022. Retail sales of new vehicles this month are expected to reach 1,087,400 units, a 5.9% increase from April 2022.

What is predicted to happen to used car prices in 2023? ›

As a result, Cox Automotive has revised its 2023 forecast for the used-car market as showing a 1.6% average price increase by the end of the year, instead of its original prediction of a 4.0% decrease.

What will car sales look like in 2023? ›

In 2023, analysts expect the US light vehicle market to expand by up to 12%, with total sales nearing 15 million vehicles. EV sales could increase as much as 60% to nearly 1.5 million cars, or a 10% market share, up from 7% in 2022.

Will car supply get better in 2023? ›

According to industry analysts from Cox Automotive and J.D. Power, some automotive market conditions are likely to improve in 2023, but perhaps not enough to trigger radical change. "We certainly do expect the market to get better than it's been," says Tyson Jominy, vice president of data and analytics at J.D. Power.

How much will cars cost in April 2023? ›

The average transaction price (ATP) of a new vehicle in the U.S. remained relatively flat in April 2023 at $48,275, a month-over-month decrease of 0.03% ($14) from an upwardly revised March reading of $48,289.

Will car sales improve in 2023? ›

New vehicle sales volume is expected to have a 5.7% year-over-year rise for Q1 2023. March is expected to see an 8.6% year-over-year sales volume rise. This performance has put 2023 on track to hit a 15 million annual rate, a steep uptick from last year's 14.1 million.

How do you beat car inflation? ›

Here are a few tips to help you buy a car during inflation:
  1. Set a Budget. On average, new car prices are at $47,000. ...
  2. Narrow Your Search. There are hundreds of car models on the market today. ...
  3. Order Straight From the Manufacturer. ...
  4. Get Pre-Approved for a Loan. ...
  5. Don't Expect Used Cars to Be a Bargain. ...
  6. Be Prepared to Negotiate.
Jul 25, 2022

Is it better to lease or buy a car during inflation? ›

Vehicles leases offer inflation protection

Residual value is the vehicle's deemed value at the end of the lease term — set at the start of the lease. Your buyout is set at the time you negotiate the lease and this is why buying out a lease right now is one way to actually “beat inflation”.

What should you not buy during inflation? ›

  • Stocks. Households lose net worth (and their financial safety nets) when they invest too aggressively in the stock market during a downturn. ...
  • Cars. One item hit hard by inflation this year has been car prices. ...
  • Clothing. ...
  • Gasoline. ...
  • Eggs. ...
  • Coffee. ...
  • Travel. ...
  • 14 Household Items With Falling Prices Amid Record Inflation.
Jul 19, 2022

Who is most hurt by inflation? ›

Low-income households most stressed by inflation

Prior research suggests that inflation hits low-income households hardest for several reasons. They spend more of their income on necessities such as food, gas and rent—categories with greater-than-average inflation rates—leaving few ways to reduce spending .

Can you beat inflation? ›

The best way to hedge against inflation is to diversify your investment portfolio. You will beat inflation if the returns from your investments exceed the inflation rate. Good investments to hedge against inflation include real estate, bonds, and gold.

Why can't they just stop inflation? ›

If people and markets lose faith that governments will respond to inflation with such policies in the future, inflation will erupt now. And in the shadow of debt and slow economic growth, central banks cannot control inflation on their own.

Why is vehicle inflation so high? ›

In 2021 and early 2022, global shipping problems, a semiconductor shortage and factory shutdowns coincided with strong demand to push vehicle prices sharply higher.

Do car loans go up with inflation? ›

Although a driver's rates depend on several factors — including a borrower's credit history, term length, vehicle type and more — increased inflation means higher interest rates for drivers even with perfect credit.

Why are cars so expensive now? ›

Because of these supply chain problems, the global automotive industry has produced millions fewer vehicles than it would have otherwise. The supply of new vehicles is starting to improve, but those millions of "missing" vehicles are still gone. Lower supply, higher prices: It's basic economics.

Are cars still going up in value? ›

After a brief slump, prices are up again. Combined with higher interest rates, monthly payments are on the rise. Prices had finally begun to soften after a historic used-car price spike throughout much of 2021, but rose 4.4 percent in April, driving inflation across the board.

Why is Carvana going out of business? ›

Carvana is an American online used car retailer headquartered in Tempe, Arizona. The company was the fastest-growing used vehicle retailer in the United States at one point but is now saddled with debt and experienced a significant decline in revenue.

Why do car prices go down? ›

Increased inventory pushing down prices

But the leading reason for the drop in used car prices is the increased supply of new cars.

Will cars be cheaper next year? ›

Used-Car Prices Will Drop: Here's How to Prepare. As new-car inventory begins to stabilize, J.D. Power forecasts that used-vehicle values will begin their descent to more normal levels by late 2022 and into 2023. “We do expect used prices to cool once new-vehicle production and inventories begin to recover,” Paris said ...

What happens to the value of a car once you drive it off the dealer's lot? ›

A brand-new car loses somewhere between 9–11% of its value the moment you drive off the lot.

Are new cars getting more expensive? ›

“Overall, the average price gap between base models and vehicles as optioned up by customers has soared, rising from 24.6% in 2002 to 38.1% in 2022.”

What is the #1 American made car? ›

Tesla Model Y

What is the most loved car? ›

Most popular cars in 2022
Most Popular Used Cars in the US, 2022 – iSeeCars Study
RankVehicle2021 Rank
1Ford F-1501
2Chevrolet Silverado 15002
3Ram 15003
7 more rows
Jan 14, 2023

What is the most sold car of all time? ›

1. Toyota Corolla (50 Million+ units sold by 2021) Since its debut in 1966, the legendary Toyota Corolla has been destined for greatness and has sold over 50 million units through 12 generations.

How much has inflation increased car prices? ›

A new car will run you about $51,000 on average – about 30 percent more than in January 2020. A chart showing how much prices for new and used cars of different ages have increased since the beginning of 2020. New cars now cost $51,000 on average, up from $39,000.

What things are most affected by inflation? ›

Top 10 inflation categories for December 2022
Food at elementary + secondary schools305.2%
Fuel oil41.5%
Motor fuelsExcluding gasoline32.3%
5 more rows
Jan 13, 2023

Is car insurance going up due to inflation? ›

Inflation drives higher insurance costs

Inflation is a primary culprit in escalating prices or premiums for auto coverage as costs rise for mechanics, other types of labor, repair parts and more. "Really, the numbers come down to inflation," Deventer said.

Are new car prices still inflated? ›

New and used vehicle prices are not adjusted for inflation. Car buyers haven't seen price hikes like these since the 1970s and 80s.

Who benefits from inflation? ›

Inflation allows borrowers to pay lenders back with money worth less than when it was originally borrowed, which benefits borrowers. When inflation causes higher prices, the demand for credit increases, raising interest rates, which benefits lenders.

Who suffers most during inflation? ›

In summary: Inflation will hurt those who keep cash savings and workers with fixed wages. Inflation will benefit those with large debts who, with rising prices, find it easier to pay back their debts.

How do you beat inflation? ›

How to Beat Inflation
  1. Treasury Inflation Protected Securities (TIPS) ...
  2. Index Funds. ...
  3. Commodities. ...
  4. Start a Business. ...
  5. Lock in Higher Interest Rates on Cash Accounts. ...
  6. Lock in Lower Fixed Rates on Debt. ...
  7. Invest in Good Businesses with Low Capital Needs. ...
  8. Avoid Traditional Bonds.
Feb 17, 2023

Why did my car insurance go up $100? ›

Auto accidents and traffic violations are common explanations for an insurance rate increasing, but there are other reasons why car insurance premiums go up including an address change, new vehicle, and claims in your zip code.

What is the outlook for car insurance in 2023? ›

Car insurance costs are on the rise in 2023. According to personal finance website ValuePenguin, insurance rates across the US are expected to rise by 8.4%, bringing the total average premium for full coverage to $1,780 per year.

Why did my auto insurance go up in 2023? ›

A recent analysis by the Insurance Information Institute (Triple-I) showed that U.S. auto and homeowners insurance premiums lagged behind the inflation rate in 2020 and 2021, laying the groundwork for the premium increases which occurred last year and will continue into 2023.

How long will cars be overpriced? ›

For this reason, it may be best to hold out for as long as possible before shopping for a new used car. As inventory slowly continues to level back out, so will prices. In the past, Clark has predicted that the market would gradually improve throughout 2023, and now we're finally starting to see some lower prices.

How long is the car market going to last? ›

Given the rules of supply and demand, fewer cars for sale will likely mean prices stay elevated that much longer. Based on those assessments, it looks like new cars will be in short supply well into 2024, and the number of used cars on the market could lag behind demand at least a couple of years beyond that.


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