The US inflation rate rose to 6.8% over 2021 where used car prices proved a major driver of inflation. The average used car sold for more than $27,000 in November 2021, a 27% increase in just one year. A worldwide shortage of semiconductors took place because of COVID-19, a hurdle in manufacturing new cars. More demand and low supply of cars caused inflation and used car prices have risen 45% over 12 months. However, this surge price of used cars is supposed to drop as new car inventory will improve and the chip issues would alleviate in the months ahead.
The annual inflation rate for the United States hit 6.2% for the 12 months of 2021, considered the highest in more than the last three decades, as measured by CPI. There are a bunch of factors involved in inflation, but used-car prices have proved a major driver of U.S. inflation in 2021. Used car prices soared by 32% in the year 2021; conversely, the price of used cars fluctuated by an average of 0.6% from 2009 to 2019 (Simes, 2022). This insane cost of a used car has risen because of high demand and low supply. The pandemic of COVID-19 disorders supply chain as a shortage in the essential auto components of vehicles such as semiconductors and chips. Shortages in semiconductors prove an obstacle in manufacturing new cars; therefore, buyers had no choice, but they had to buy used cars, which became the reason for inflation (The used-car market sent American inflation soaring, 2022).
The used-car market sent U. S inflation soaring in 2021.
According to the Bureau of Labor Statistics (BLS), annual consumer-price inflation in the U. S had reached a much higher level than expected. The US inflation rate rose to 6.8% over 2021, which is the highest point since 1982. There are involved others factors, but surging prices for used cars have been a major driver of inflation in 2021. In November, the average used car sold for more than $27,000; statistically, this is a 27% increase in just one year and 41% higher than the pre-pandemic average of two years ago (What to expect in the 2022 used car market, 2022).
Graph 1: Used Car Prices are Up nearly 40% During the Pandemic.
Source: U. S BUREAU OF LABOR STATICS.
The major reason for the surge in used car prices is because of the pandemic, as the US saw auto production drop 99% during the period of covid-19. The automobile industry has become dependent on microchips, from engine management to driver assistance. The automobile industry could only build fewer cars than planned because of the worldwide microchip shortage. This short supply and more demand pushed new car prices up and many shoppers entered the used car market. Respectively, inflation took place, and the prices of used cars surged, too.
Used Car Price Bubble Predicted to Pop Soon.
Used car prices could decline by 30 percent shortly as the need for the global chip shortage is fulfilled, say in a report published by multinational financial firm KPMG. The KPMG report indicates that microchips will eventually be available enough and will facilitate automotive manufacturing to meet supply and demand. If this happens the used car market will collapse. Further, KPMG reported arguing that Americans who bought used cars during the surge in prices could find themselves driving an asset worth less than they paid for it in the time of inflation So, in case of the bubble bursts, trade-in values would crash (What to expect in the 2022 used car market, 2022).
To sum up, the future of used cars as assets depends on inflation. If the high inflation period stretched and continued, this would create a new floor for used cars as assets. Otherwise, in the case interest rates were raised to lower inflation, demand would decrease, causing used car values to plunge. On the other side, The KPMG report also argues that chip supply issues would as it is until mid-2022, in the same regard, the full supplies of semiconductors will not be available until 2023, which give us a sign that perhaps the price of used vehicle will remain on a surge for at least another next 12 months (What to expect in the 2022 used car market, 2022). However, most reports and experts argue that the current frenzy in the used-car market will come to an end very soon as the microchip shortage and other supply chain problems ease.
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Gharehgozli, O., 2021. Current State of US Economy Post-Pandemic and the Future of Core Inflation. SSRN Electronic Journal,
Symes, S., 2022. Used Car Price Bubble Predicted To Pop Soon. [online] Notorious. Available at: <https://www.motorious.com/articles/news/used-car-price-bubble/> [Accessed 3 January 2022].
The Economist. 2022. The used-car market sent American inflation soaring in June. [online] Available at: <https://www.economist.com/graphic-detail/2021/07/14/the-used-car-market-sent-american-inflation-soaring-in-june> [Accessed 3 January 2022].
Advisory.kpmg.us. 2022. Used car prices could crash – will they? [online] Available at: <https://advisory.kpmg.us/articles/2021/used-car-prices-could-crash.html> [Accessed 3 January 2022].