A New Inflation Age, Part Three: Vehicles

By Nadir Tekarli

The complex nature of supply chains leads us to the final part of this series focusing on the new vehicle market. The U.S. auto market is a $462 billion industry with long supply chains across the globe. More importantly, as most Americans are totally dependent on cars for transportation, the price of vehicles and related services are a key line item in every household’s budget.

The chief problem with auto production globally remains the semiconductor shortage, the topic of the last article. Unfortunately, it does not appear that this problem will abate until the latter half of 2023, at the earliest.

As if semiconductor shortages weren’t enough, rising gas prices have begun to shift consumer demand away from trucks and SUVs for the first time in a decade. Because of the semiconductor shortage, automakers were prioritizing their limited supply for their most expensive vehicles, SUVs and trucks, leaving smaller sedans and hybrid vehicles in shorter supply.

Electric vehicles, which are growing in popularity, are even more susceptible to the supply chain challenges of our time. Unlike internal combustion vehicle production, the massive demand for batteries and electric vehicle infrastructure will remain a problem for years as demand for raw materials such as lithium outstrips supply. Supply is so tight that VW announced it sold out of its 2022 supply of electric vehicles for the U.S. and EU in May. Nissan COO Ashwani Gupta described the situation succinctly: “For me today, the supply chain crisis is the new normal.”

Though demand for autos remains strong, rising interest rates, inflation, and high gas prices will put a damper on affordability while pushing potential new car buyers into the already-hot used car market. Buyers pushed into the used car market will further have to settle for older or higher mileage cars to keep payments within their budget.

Rising interest rates are putting a heavier burden on consumers, with the average monthly payment for a new car rising to $656 in May, up from $559 in May 2019.

The broader economic shift away from goods and back towards services will be a release valve for high demand in most sectors. Pent-up demand for vehicles, though, seems to be the exception with the average American vehicle reaching a record-high age of 12.2 years old. Those cars will need to be replaced, which will keep demand for vehicles high for some time.

Vehicle production will be one of the most difficult supply chains to return to pre-COVID standards. It will be a while before car lots fill back up and consumers are able to resume haggling with sales associates for the best deal.

Nadir Tekarli is an economic research associate at ABA.

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Nadir Tekarli is an economic research associate at ABA.