‌Car prices have soared following the coronavirus lockdown and two years after the worst inflationary episode in the United States since the 1980s, the industry is showing that the return to normalcy will be a long and bumpy ride.

In 2021 and early 2022, global transportation issues, semiconductor shortages, and factory shutdowns coincided with strong demand that pushed vehicle prices up sharply. Economists had hoped prices could ease as supply chains recovered and the Federal Reserve’s interest rate hike deterred borrowers.

Instead, new car prices rose further. Domestic automakers are still producing fewer cars and focusing on more profitable luxury models. Used car prices helped dampen headline inflation late last year, but rebounded in April as a lack of supply clashed with an increase in demand.

Echoes of the pandemic’s disruption to the industry are reverberating through the economy even after the state of emergency has formally ended, illustrating why the Fed’s fight to contain inflation could be a long one as consumers spend despite higher prices.

“Inflation will not be a smooth ride down — there will be bumps in 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 them have to do with pandemic demand.”

Increased car prices have proven uncomfortably sticky. Prices of used cars have fallen, but va more muted – and volatile — fashion than economists predicted. And new cars continue to rise in price this year as manufacturers struggle to maintain margins set for 2021.

“The big question now is: Will companies start competing with each other on price?” Mrs. Uruci asked.

But that is difficult to answer because the car market has changed drastically. To understand the situation, it is useful to examine how the automotive industry worked in the past.

“When we entered the pandemic, the dynamic in the auto industry was the idea that retail profitability was under constant pressure, fueled by the Internet,” said Pat Ryan, chief executive of CoPilot, a car-buying app that monitors prices at about 40,000 dealerships. .

Automakers produced more cars than the market demanded, offering incentives to clear inventory and compete with cheaper imports. Sellers capitalized on volume and financing, often leading to customer complaints of excessive fees.

As the coronavirus spread, factories closed. Even when they reopened, there were few semiconductors left. Manufacturers allocated the chips to their most expensive models — trucks and SUVs — offsetting lower volumes with higher profits on each sale. The five million or so cars that would normally have been produced never were, Mr Ryan said.

Dealers got in on the act, charging thousands of dollars above list price — especially as stimulus programs were implemented and consumers looked to upgrade their vehicles or buy new ones to escape the cities. AND studies Economist Michael Havlin, published by the Bureau of Labor Statistics, found that trade markups accounted for 35 to 62 percent of total new vehicle consumer inflation between 2019 and 2022.

The lower sales volumes had disadvantages; dealerships also make money on service packages years after the cars are gone. But on reflection, “these were certainly the best of times for car dealers,” Mr Ryan said.

However, it was the worst time for anyone who suddenly needed a car.

That’s the position Pittsburgh’s Hailey Cote found herself in last summer. After tiring of low-paying farm and restaurant jobs, she built a house cleaning business for $25 an hour. When her Jeep Grand Cherokee broke down in 2005, she knew she had to find a replacement quickly so she could haul ferry cleaning equipment to every job and get to school where she was studying for a career in counseling.

At the time, the used cars she could find were only a few thousand dollars less than the cheapest new cars, so she chose a base model 2022 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 costs are almost as high as her rent, leaving nothing for savings or recreation.

“I think it’s the basic needs that are really the worst,” Ms Cote, 29, said. “Food has gone up a bit, but housing, healthcare and car costs are pretty brutal.”

The price frenzy started to ease in the second half of 2022 as more vehicles started rolling off the assembly lines. But the offer grew only gradually. Automakers, reluctant to give up the profits made possible by scarcity, began talking about applying “discipline” to their production targets.

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

“Experience with higher prices and the ability to move prices expands entrepreneurs’ perspectives in terms of their options,” he said. “It’s attractive when you can do that.”

One way automakers tried to raise prices was by dropping cheaper models like the Chevrolet Spark and Volkswagen Passat. Auto companies introduced electric vehicles in response to federal subsidies, but that didn’t help lower prices — they started with luxury versions like the $42,995 Mustang Mach-E.

And supply restrictions have also been added. The generation of cars that would typically go on three-year leases is smaller than usual. Those who leased cars in the spring of 2020 have an incentive to buy them at prices that were locked in before everything got expensive.

In addition, some car rental companies are aggressively adding to their fleets after being starved for several years, leading dealer groups like Sonic Automotive complain about the earnings that they are out of competition in the auctions.

“There are so many sources of used vehicles that have just dried up in the last few years,” said Satyan Merchant, senior vice president of financial services at credit monitoring firm TransUnion. “And it all has a knock-on effect.

The Fed is raising interest rates sharply to slow demand — including for cars — and cool rising prices. But during the adjustment period, it’s even harder 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 ago. The used car average is $523 per month, up $110 over the same period.

Cars are now a bifurcated market: Demand remains strong at the high end, home to wealthy buyers excess savings from the last two or more years are able to absorb higher interest rates or simply pay in cash. Some are only now receiving the vehicles they ordered in 2022 at exorbitant prices.

Competition in vehicles is also fierce on the low end, as people with thin financial cushions and personal jobs cannot afford to give up the transport that is synonymous with the car in most of the country. The labor market has he stayed strongespecially for personal jobs in fields like hospitality and health care, so more people have workplaces they can get to.

And many people in between, who may be changing cars every few years, are waiting for prices to drop.

“What we’ve seen is the disappearance of the middle,” said Scott Kunes, the dealer group’s Midwest chief operating officer. He blames automakers for abandoning the cheaper, smaller, entry-level cars people need to get around, especially as interest rates put better versions out of reach. “It doesn’t make any sense to me.

The situation may begin to resolve itself soon. Wholesale car prices have began to falland automakers offer more incentives. Kelley Blue Book data shows average prices have fallen below list over the past two months, a signal that demand is easing, according to Jonathan Smoke, chief economist at Cox Automotive. Prices have fallen in recent months for electric cars – the fastest-growing segment of new car sales, even if it’s a small part of the overall market.

However, recent history has shown that price trajectories are rarely linear. Adam Jonas, an auto industry analyst at Morgan Stanley, said that in the short to medium term, the only answer is more inventory.

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

Jack Ewing contributed reporting.

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