Driving Factors Behind Auto Inflation

Auto inflation has been a prominent trend in recent years, with both new and used car prices surging. The November Consumer Price Index (CPI) revealed an uptick in auto inflation, with new and used car prices showing month-over-month increases. Yahoo Finance Senior Autos Reporter Pras Subramanian delves into the key factors driving this rise in automotive pricing pressures.



1. Supply Chain Disruptions: The persistent chip shortage, exacerbated by the COVID-19 pandemic and geopolitical tensions, has significantly impacted the production and availability of new vehicles. According to J.P. Morgan Research, the average price of a new vehicle in the U.S. was up 4.2% year-over-year in January 2023, reaching an all-time high for the month. This shortage has fueled demand for used cars, with average prices tracking around 30% above pre-pandemic levels.
2. Increased Raw Material Costs: Higher production costs, driven by increased raw material costs such as steel and aluminum, have also contributed to the rise in new and used car prices. J.P. Morgan Research estimates that half of the increase in new vehicle prices relates to the passing along of higher input costs. While used car prices are expected to drop more significantly, with a decline of roughly 10% in 2023, new car prices are expected to remain high, with a decline of around 2.5% to 5% year-over-year.
3. Inflationary Input Costs: Inflationary input costs, such as diesel, freight, and shipping, have also contributed to the elevated prices of new vehicles. Even though raw material costs are falling, suppliers have other higher non-commodity costs that continue to impact production costs.



Automakers have adapted their production strategies to mitigate the effects of the chip shortage by prioritizing the production of higher-margin vehicles, reducing the number of variants offered, and investing in alternative technologies. For instance, General Motors (GM) has focused on producing more high-end models with fewer features, while Tesla has developed its own chips to reduce dependence on external suppliers. Additionally, automakers have been working with semiconductor manufacturers to secure long-term supply agreements and diversify their chip sources.

In conclusion, auto inflation is driven by a combination of supply chain disruptions, increased raw material costs, and inflationary input costs. As semiconductor supply is expected to improve in 2023, new car prices are likely to remain elevated due to these factors. Automakers are adapting their production strategies to mitigate the effects of the chip shortage, but the long-term impact on car prices remains uncertain. Investors should monitor these trends and consider the potential impact on their portfolios.