A new era of inflation, part three: vehicles

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By Nadir Tekarli

The complex nature of supply chains brings us to the final part of this series on the new vehicle market. The US auto market is a $462 billion industry with long supply chains around the world. More importantly, since most Americans are totally dependent on cars to get around, the price of vehicles and related services is a key part of every household’s budget.

The main problem in automotive production on a global scale remains the shortage of semiconductors, the subject of the last article. Unfortunately, it doesn’t look like this problem will subside until the second half of 2023, at the earliest.

As if semiconductor shortages weren’t enough, rising gas prices have started to shift consumer demand away from trucks and SUVs for the first time in a decade. Due to the shortage of semiconductors, automakers were prioritizing their limited supply for their most expensive vehicles, SUVs and trucks, leaving smaller sedans and hybrids in more limited 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 electric vehicle batteries and infrastructure will remain a problem for years to come, as demand for raw materials such as lithium outstrips supply. The offer is so tight that VW announced it exhausted of its 2022 electric vehicle offering for the US and EU in May. Nissan COO Ashwani Gupta succinctly described the situation: “For me today, the supply chain crisis is the new normal.”

Although demand for automobiles remains strong, rising interest rates, inflation and high gas prices will dampen affordability while pushing potential new car buyers into the already hot car market. second hand. Buyers pushed into the used-car market will additionally have to settle for older or higher-mileage cars to keep payments within their budget.

Rising interest rates place a greater burden on consumers, with the average monthly payment for a new car rising to $656 in May, compared to $559 in May 2019.

The broader economic shift from goods to services will be a release valve for strong demand in most sectors. Pent-up demand for vehicles, however, seems to be the exception with the average American vehicle reaching a record age of 12.2 years. These cars will need to be replaced, which will keep the 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 some time before car lots fill up and consumers can start haggling with sellers again to get the best deal.

Nadir Tekarli is an associate researcher in economics at the ABA.

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