Contributing Factors to the Price Increases & Shortages in the Automotive Industry*

19/10/2021 - 12:45 | Featured | IAB Team

There are countless people who are looking for a new car right now, and they may have a difficult time finding it. The prices of new cars and used cars have gone up significantly. According to a report published by the Consumer Price Index in August, the overall price of a car has gone up 32 percent when compared to a year earlier. Specifically, used car prices are up 42 percent when compared to the first quarter of 2020, which was right before the pandemic had a major impact on the economy as a whole, including the auto market.

Furthermore, the prices of new cars are going up as well. This is because there is a significant shortage of new cars on the market. According to a recently published report by Car and Driver, there were 3.4 million new cars available in May 2020. Then, by July of 2021, the available stock of new cars had tumbled to about 2.5 million. This represents a drop of more than 25 percent.

So, why is all this happening, and what does it mean for people who are interested in purchasing a new or used vehicle? There are several key points to keep in mind.

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The Chip Shortage Is Impacting New Car Production

The global pandemic has wreaked havoc on the international supply chain, and this includes computer chips. Computer chips are critical for countless industries. Right now, many of the computer chips are being used to make medical equipment, which is clearly in demand given the coronavirus pandemic. When the increased demand for computer chips is combined with a reduced supply due to the pandemic, there is a severe shortage of numerous goods throughout the world. This includes new computers, video game systems, and even motor vehicles.

Even though there was a backlog of new cars due to the coronavirus pandemic, this has largely been cleaned out. Furthermore, new cars have been slow to come in due to the computer chip shortage. The number of new vehicles on the marketplace has dropped significantly, and production has not yet picked up to meet the rising demand.

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The Lack of New Cars Is Impacting the Used Car Market

Because there are not a lot of new cars available, this is causing the used car market to rise in price substantially. People who would be purchasing new cars are now purchasing used cars. Because there is more demand for used cars, the price is going up. Furthermore, a lot of people are hesitant to trade in their vehicles because they know they will have a difficult time finding a new car. All of this is leading to a drop in the used car supply, driving up prices.

Furthermore, the rise of prices for used vehicles coupled with the shortage of new vehicles has in turn increased the demand for used and remanufactured engines. Now more than ever people are making the decision to replace their worn-out engine instead of just simply buying a new vehicle. At this point in time, most engines are still available in the used and remanufactured marketing; However, less popular parts like Mitsubishi engines could end up with a minor shortage if the market doesn’t soon turn around.

Rental Car Companies Are Also Buying Up Used Cars

Another factor that is leading to a rise in used car prices is rental car companies. During the pandemic, a lot of people didn't travel, so there were not as many people renting cars. A lot of rental car companies sold off their used cars because they felt they would not need them in the foreseeable future.

Now that much of the world is opening up again, a lot of people are traveling, which means they are renting cars. Many rental car companies have paid a premium to purchase used cars to bring their fleets up to levels that are commensurate with rising demand. With many rental car companies purchasing used cars, there are fewer cars for everyone else.


Inflation Is Playing a Role

Many people are concerned about inflation, as it is contributing to a rise in staple goods and services. Inflation is also contributing to a rise in car prices. According to the Consumer Price Index, inflation jumped by more than five percent in June when compared to prices just one year ago. This is the highest inflation rate in more than a decade, and it could play a role in rising car prices as well.

As demand for cars of all types, including sedans, trucks, and SUVs, continues to surge, prices could go up even further; however, there are still opportunities for those who are interested in purchasing a vehicle.

Dealers Are Paying More Money for Used Cars

Even though used car prices are more expensive, this also means that dealers are willing to pay more money to people who are willing to trade in a vehicle. They know they will be able to get top dollar for that car, so they may be willing to pay more to those who are trading them in. Therefore, those who are interested in swapping one car for another might be able to get more money for their car now than they can in the future. This could be a good time to trade in a used car.

Used Cars

The Demand Might Come Down in the Future

Finally, there are some signs that the demand for motor vehicles is starting to slow. New car inventories are going to go up as the end of the year approaches. This is going to alleviate some of the inventory issues that have plagued the industry for the past year. Furthermore, some dealerships might be getting ready to offload older models to make room for new ones. With reports that the prices of used cars are already starting to drop, this could be a good time to start looking for cars once again.


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