Impacts of Inflation on Automobiles

 Impacts of Inflation on Automobiles

Written by: Emma K. 

The world as we know it today is run on automobiles. As of 2019, there were 276 million registered vehicles in the United States (“Car Ownership Statistics” Lena Borrelli 2021)- a number significant enough where anything done to disrupt its market would create an immense impact on the economic state. Recent events involving the inflation of gas and the price of cars in general, have caused tremendous impacts on the economy and US citizens, looking to see if a better fate is on the horizon. 

In order to understand where we are at today, it is important to first look at how we got here. Taking the increase of car prices, especially used, into consideration, the inflation was caused by many different factors, but arguably, the root of the issue stemmed from the supply of a chip that is installed in cars. The shortage of a seemingly, simple chip caused more trouble than one would assume. These chips are responsible for many essential roles in cars such as: powering the dashboards and diagnostics- without these chips, new cars cannot be produced. However, the inflation was not necessarily seen as intensely with new cars.  As seen in the Bureau of Labor Statistics, accessed via FRED, the rate of inflation on used cars and trucks is not only the highest since 2008, but also, much higher than the increase on new vehicles. So what does the shortage of a chip that is installed in new cars have to do with the price of used cars? Shouldn’t the price of new cars rise too? Well, as the new car market is scarce, consumers turn to the used car market instead. As the demand for used cars increases so does the price. Normally, as these prices continue to rise, they must eventually stop before rising above the price of new cars. However, due to the shortage of new cars, there doesn’t seem to be a cap for where these prices stop. 

Not only has the actual price of vehicles increased, but so has the price of owning one. “On Monday, 3 January 2022 AAA reported that the average cost of a gallon of gas was $3.28 after steady growth since hitting a pandemic low of $1.94 in May 2020” ( “What has been the increase in the price of gas in 2022?” William Gittins). Even in the past few weeks, the gas prices have seen another increase. It is no surprise the prices rose again after the pandemic low reported by the AAA, but the war in Ukraine has continued to accelerate the increase to an unheard degree.  In order to support the Ukranians, the United States halted imports of Russian oil. Unfortunately, as our oil supply then decreased, the prices of oil inflated immensely, as seen.

Clearly, from the inflation across the board, it seems as though it is becoming a luxury just to own a car. For consumers, the impact hasn’t been small. Ryan Kelly, Chris Kukla, and Ashwin Vasan at the Consumer Financial Protection Bureau released an article stating that they believe that as the size of car loans increases, it will put more pressure on the budget of the consumer. Specifically they share, “Auto loans are already the third largest consumer credit market in the United States at over $1.4 trillion outstanding , double the amount from 10 years ago and expected to grow further”. As consumers can see a rough market in front of them, it causes them to be less likely to participate, only lowering the aggregate money supply. It also doesn’t help encourage consumers to spend when the price of gas is so high. With consumer’s seeing a need to be more cautious with their money, the stimulation of the market is dropping.

An efficient economy cannot continue like this forever, so how the United States moves forward to improve the market for cars will be essential. Many sources state that prices of cars won’t be coming down anytime soon.The key will be fixing the supply of new cars. However, there is more hope for the prices of gas. Advisors from Forbes created a list of four things the White House is hoping to do to combat the inflation of gas including: authorizing E15 gasoline sales this summer, implementing a gas tax holiday, releasing oil from the strategic reserves, and lifting sanctions on Venezuela. If success can be found in decreasing the price of buying and owning a car, positive economic effects can be found as consumers will be more willing to invest and spend their money. 

Borrelli, Lena. “Car Ownership Statistics.” Bankrate, www.bankrate.com/insurance/car/car-ownership-statistics/#:~:text=There%20are%20276%20million%20vehicles%20registered%20in%20the%20U.S.%20as%20of%202019.

Ryan Kelly, Chris Kukla. “Rising Car Prices Means More Auto Loan Debt.” Consumer Financial Protection Bureau, 24 Feb. 2022, www.consumerfinance.gov/about-us/blog/rising-car-prices-means-more-auto-loan-debt/.

Smialek, Jeanna. “Few Cars, Lots of Customers: Why Autos Are an Inflation Risk.” The New York Times, The New York Times, 10 Apr. 2022, www.nytimes.com/2022/04/10/business/economy/cars-inflation.html.

Smith, Kelly Anne. “4 Ways the White House Wants to Lower Gas Prices-Will They Work?” Forbes, Forbes Magazine, 13 Apr. 2022, www.forbes.com/advisor/personal-finance/how-will-gas-prices-go-down/.

Thompson, Wesley Wren and Keenan. “Here's What's Going on with Used Car Prices-It's Not Just Chips.” Autoweek, Autoweek, 1 Nov. 2021, www.autoweek.com/news/industry-news/a36863741/used-car-prices-skyrocketing/.