Why used-car prices are driving US inflation higher

75

Inflation is a broad concept that brings every factor of the urban lifestyle into consideration. It is a key concept that describes how much power customers have over the market with their money. Inflation is a financial matter at large, as it best describes how much goods customers can buy with their money. When inflation is rife in the market, it affects the buying power of consumers as well. Inflation is generally described as a percentage increase or decrease in prices over a certain period of time. If the wages can’t cope with the rising levels of inflation, the value of money and the standard of living falls dramatically.

The economy of the United States is the largest in the world, directly influencing the economies of countless other nations as well. Rising inflation in the US directly affects the global stock and trade markets. Recently, the main force driving the rate of inflation in the US to astronomical heights is rising used-vehicle prices. With the help of car-selling portals like CarIndigo and Cars.com that understand the used car market in-depth, we analyze the state of inflation in the overall US market.

How rising used car prices are driving inflation in the US

The used car market is currently booming with business, as used car prices are now touching the sky. The unusual combination of high demand from customers and low supply of in-vehicle inventories are driving the prices of used cars to new heights. 

In June, the government reported that used-car prices had soared by 10.5% in one month alone. This was after similarly strong spikes of 7.3% in May and 10% in April. The spike in June was the biggest surge, ever since the government started keeping a track record during Dwight Eisenhower’s first year of presidency in 1953.

Another shocking fact highlighted the severity of the rising used car prices. As a matter of fact, the surge in used car prices accounted for about 1/3rd of the overall inflation and increase in the cost of living in the US Within the first 6 months of 2021, used vehicle prices are now 32% more than the usual price. However, if you look at the market scene from 2009 to 2019, the cost of used vehicle prices fell by an average of 0.6% every year.

The reason behind rising car prices

The major reason behind this unusual market phenomenon can be attributed to the impact of pandemic on the global automotive supply chain. The problems began when rental car agencies raised the prices of new cars. In response, the automakers cut down their production lines in order to cope with the shortage in manpower and energy. In the days of the pandemic, people used to drive around more as it was the only means of transportation available. The desire for a new car slowly began to creep into the minds of car enthusiasts.

After a year, the global production lines were back and running again. However, this time they faced another crucial crisis, in the form of semiconductor shortage. The semiconductor chips are an essential component of every new vehicle nowadays, as they control the infotainment systems and every other part of the vehicle.

Automakers were pumping out fewer new cars to the market than usual, hence rental car companies had to resort to used cars in order to replenish their inventories. Combine that with the government stimulus money that every American individual got his hands on during the pandemic, the first thing on consumers’ minds was to invest in a new car. Simultaneously, public transportation also began, but Americans were reluctant to travel in public owing to the stringent regulations and the fear of the virus. Similarly, folks who had moved out of cities needed a car to avail their daily groceries and other necessities.

Unsurprisingly, with the crunching demand for used cars, the prices of used cars have soared to new heights. This has directly impacted the rate of national inflation as well.

What aftermath can Americans expect?

The growing rate of inflation could prompt the US central bank, the Federal Reserve, to raise the interest rates. In March, Joe Biden signed an economic relief bill that sent a $1,400 cheque into every American’s bank account. The build-up of savings has prompted Americans to invest more in their favorite goods, thus driving prices higher.

As it stands right now, the semiconductor shortage is slowly easing up. Automakers have also boosted their production lines to bring the balance back between demand and supply. Slowly but surely, used car prices will revert back to pre-pandemic levels. The lowering of used car prices certainly fits in with the claim made by the Federal Reserve, that most of the pandemic bottlenecks will be resolved by the end of this year. This will certainly ease the US inflation levels in the upcoming days.

On the other hand, Americans aren’t in for a respite from inflation for now either. The demand for various consumer goods and services is on the rise, which includes gas, groceries, clothes, and online tickets. We recommend Americans to keep their budgets tight for at least till the end of the year.

Comments

comments