The Inflation We're Seeing Is Affecting The Auto, Used Auto Market
What is inflation? In its most simplistic form, inflation is the general rise of prices in a given economy which in turn reduces the general consumer’s purchasing power. Since the beginning of the pandemic, the Federal Reserve and Congress have been engaging in quantitative easing and other measures to provide liquidity into the market and keep the economy afloat during this difficult time.
From an economic standpoint the more money you print the less purchasing power those dollars have. Continued monetary stimulus along with low interest rates means money is cheap to borrow, this causes the value of the dollar to decrease and in turn make prices rise. This reality coupled with the supply chain problems that many sectors, especially the auto industry, have been dealing with contributes to increased prices to the consumer.
If a company must pay higher prices for the raw materials due to inflation and supply chain issues, they will inevitably charge more in order to continue to make a good profit margin. As production costs increase so must consumer prices of the finished goods or services. Over the past year steel prices have risen from around $500 per ton of steel to around $1,800 in July of 2021. Today most cars on the road are primarily made of steel and other materials. This means that manufacturers have a higher cost to produce new vehicles which end up being passed right along to the consumer.
Not only are prices of these common raw materials going up, but there are also massive supply chain issues that the pandemic is causing, and companies are still trying to work them out. Take the semiconductor shortage for example. Like steel is a very crucial part of today's vehicles and if it's harder to acquire these chips then in turn the price will rise accordingly. Once again, these costs inevitably fall down the pipeline to the end consumer.
What do these challenges mean for the used auto market? As soon as new cars leave the lot, they become used cars. This increase in new car prices because of inflation, increased demand, and limited supply passes down to used cars. This presents a good opportunity in the industry for companies that can use these increasing prices to their advantage like Automatic.