Believe it or not, buying a new or used car in the United States at present, has never been so hard. Supplies are improving and inflation is beginning to level out, but there are still challenges for anyone looking to buy a car.
Ever since 2020, prices have been climbing higher and quicker than in the last three decades, according to recent data from the Bureau of Labor Statistics (BLS).
In addition, consumer price indexes (the average changes in vehicle transaction prices) for used and new cars are much higher than four years ago.
This can be quite depressing for anyone thinking about buying a car. However, there is a silver lining. According to BLS statistics, used car inflation has been cooling down since December 2022, and quite dramatically. That being said, the price of used cars still has a long way to go before they match 2019 prices.
For anyone wanting a brand-new car, the news is not so rosy because the price of new cars has yet to slow down.
Why Are Car Prices Rising?
There are many reasons why new car prices found themselves rising significantly in 2022. Mainly, it was the result of global supply chain issues and a persistent shortage of chips that held up production in the auto manufacturing industry.
Expectations are that the supply of semiconductors will improve this year (2023), however, because of inflationary input costs, new car prices will likely continue to rise and stay high.
Let’s share some figures to highlight the point. In January 2023, the average price US consumers were paying for a new vehicle was $46,437. According to data from JD Power, this was a year-over-year increase of 4.2%. It was also an all-time high for January and a clear indication that there was no relief from the record prices of 2022.
An analyst at JP Morgan blamed the increase in new vehicle prices on higher non-commodity costs such as electricity, labor, logistics, shipping, freight, and diesel, all of which were being passed on from suppliers to manufacturers.
The shortage of new cars has led to an increased demand for used cars, causing prices for used cars to skyrocket. Several inflationary pressures have also impacted the used car markets. Current prices are around 30% higher than pre-pandemic levels.
When Will Car Prices Drop Again?
New car prices might have reached an all-time high in December 2022 and they will likely stick at the same levels they were before the pandemic. However, to answer the question “When will new car prices drop again?” they are likely to ease somewhat this year.
Current estimates are that the average transaction price (what you end up paying after any dealer markups or discounts) is going to drop by between 2.5% and 5%, year-over-year in 2023. This decrease in prices will be supported by increased inventory availability. More new cars will be available because supply constraints are easing and car makers are producing more lower-end models that are equipped with fewer high-end features.
Something else that is going to help ease prices will be commodity prices. On the whole, they are tracking lower than expected. This is because prices for synthetic, rubber, cold rolled and stainless steel are declining.
It’s possible that the cost of producing an automobile may drop by as much as 24% on average.
The answer to the question “When will used car prices drop?” is equally positive in that they are already starting to drop thanks to a cooling of the market. Used car prices peaked in 2022, but the ramp-up of new vehicle production and dealer inventory build-ups should normalize levels and reverse used car pricing.
The Mannheim Used Vehicle Value Index measures the prices dealerships pay for used cars at auctions. In the US, it reached a high of 257.7 high in January 2022. Since then, till January 2023, the same prices have fallen to 222.5. JP Morgan Research predictions are that used car prices will decline by around 10% in 2023.
How Inflation Impacts When Will New Car Prices Drop
The increases in car prices, both for new and used cars, have dampened the enthusiasm of buyers. Rising sticker prices have led to plummeting sales.
Expectations are that seasonally adjusted annual rates of light vehicle sales in the US will track 14 to 14.5 million this year. This is a very small improvement from 2022’s figure of 13.9 million. Pre-pandemic figures in 2019, were a massive 17 million, which is a sizable difference.
It is believed that the low sales are the result of record new vehicle prices, declining used vehicle trade-in values, and high-interest rates. All of these in combination negatively affect affordability.
Cox Automotive, a software company, is predicting that used car market sales are going to fall further, by around 1% this year. The reason for the drop is thought to be high prices and a poor selection of used cars. To further hamper sales there’s been a declining demand. All these things weigh on consumer sentiment and keep any potential buyers out of the market.
While all this may sound very gloomy news for the auto industry, 2023 does have great potential for rapid improvement in car sales and prices. Just like you, we’re going to be interested to see how it goes.