when will car prices drop? All informations you need

As with many consumer goods, car prices have increased in recent months. J.D. Power’s data analytics firm has revealed that the average transaction price for new cars in the U.S. rose 11.8% year-over-year in July 2022. According to data analytics firm J.D. Power, the average transaction cost for new vehicles in the U.S. rose 11.8% year-over-year in July 2022. This, combined with rising gasoline prices, is making car ownership more expensive and putting a halt to auto sales.

J.P. Morgan Research examines why car prices are rising and how inflation affects car sales trends. It also discusses when car prices will drop.

when will car prices drop All informations you need

Why are car prices rising?

Global supply chain issues are causing car prices to rise. A constant chip shortage has slowed down production in the automotive industry, creating a supply crisis. The Russia-Ukraine Crisis has also contributed to rising car prices.

Data from J.D. Data from J.D. Power shows that the average American consumer spent $45,869 on a new vehicle in July 2022. This is a record-breaking amount. Ryan Brinkman from J.P. Morgan, Lead Automotive Equity Research Analyst, said that about half of the rise in vehicle prices is due to the passing on of higher input costs. J.P. Morgan Research data shows that the weighted average cost for raw materials to make a new vehicle reached an all-time high of $1,021 in 2021. This was a 116% increase year-over-year. Electric cars have been particularly affected by rising material prices, as key metals like nickel, cobalt, and lithium — vital components of electric car battery batteries — have risen in price.

In addition, chip shortages have led to manufacturers prioritizing the most expensive vehicles in what Brinkman calls a “forced mixture-up” of car segments, further increasing average transaction prices. Brinkman stated, “If automakers don’t have enough semiconductors and if semiconductors are interchangeable — which they are to some extent — why would they put them into $25,000 cars instead $85,000 cars?”

These supply chain problems have exacerbated the already existing imbalance between supply and demand within the auto industry. This was accelerated by COVID-19. The U.S. has a history of more than a 3.5million vehicles on dealer lots at the end of each month. This number fell to a 2.7million due to factory shutdowns caused by the pandemic. However, the demand for new cars remained high throughout COVID-19 because of pandemic stimulus checks, accumulated savings, and consumers still wanting to buy them.

The used car market is also being affected by inflationary pressures. CoPilot’s car-shopping app shows that consumers are paying $10,046 on average for used cars in America today, compared to what would be expected of them in terms of depreciation. The U.S. Bureau of Labor Statistics data shows that used car prices increased 7.1% year-over-year in June 2022.

Brinkman stated that “used vehicle prices and new car prices exist in a kind of feedback loop.” Transaction prices have risen due to the shortage of new cars. Additionally, there are fewer vehicles for sale, which means less inventory of used cars. As with new vehicles, used cars are also sensitive to changes in commodity values, which can affect their scrap value.

How does inflation impact car sales trends?

The rising sticker prices have slowed consumer demand for both new and used cars, and sales have fallen as a consequence. In July 2022, the seasonally adjusted annual rate of U.S. light car sales was 13.51 million. This represents a 9% decrease year-over-year.

J.D. Power also noted that the year-to-date retail sales in June 2022 came in at just under 5.9 million units. J.D. Power also notes that the year-to-date retail sales for June 2022 were just below 5.9 million units, marking the worst half-year sales performance since 2011.

Brinkman said that “there is demand destruction occurring,” pointing out indicators such as the University of Michigan’s Buying Conditions For Vehicles survey. High prices and rising interest rates are two reasons consumers express low enthusiasm about purchasing a new car.

This is also true for the used market. According to software firm DealerTrak, sales fell 13% in June 2022 year-over-year. Brinkman stated that this is due to declining demand, declining consumer confidence, asset prices deflation, rising rates of interest, and slowing economic activity.

Despite the supply chain woes, electric cars are selling better. J.P. Morgan Research estimates that electric vehicle penetration in the EU5 countries (France, Germany, Italy Spain Spain, Spain, Italy, and the U.K.) increased to 19% in June 2022. This is an increase of 0.9 percentage points. The U.S. maintained its 7.2% record for penetration. The future of electric cars looks bright indeed: In July 2022, the American Automobile Association (AAA) released its latest survey results. It indicated that 25% of Americans would choose an electric vehicle to replace their current automobile.

When will car prices drop?

Prices for used cars are starting to fall as the market cools. They may have peaked in 2022. However, prices for new vehicles are unlikely to fall in 2022 because of persistent inflationary pressures.

“There is still a lot of inflation in the new vehicle supply chain. Brinkman stated that even though raw material prices are declining, suppliers still have higher non-commodity costs — freight, shipping, logistics, diesel, labor, and electricity — which they can pass on to automakers.

The effects of the chip shortage are likely to continue. The need for companies to replenish inventory will mean that wholesale demand will be higher than retail demand. This will put a ceiling on vehicle prices. 

Brinkman stated that new vehicle prices would range from +2.5% up to -2.5% by 2022. With my bias towards the higher end, I believe they will be between these two levels.



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