We Might Be Turning the Corner on Peak Car Prices

Anyone who’s been to a dealership—or looked at our social media user comments related to new car prices—will tell you just how expensive it is to find a new Ford, Chevy, Dodge, or any new vehicle for that matter. Vehicle inventory has been out of whack for nearly three years thanks to the pandemic and its related supply chain shortages. Add in the woes of inflation, higher fuel prices, and large hikes in interest rates, and it seemed like the world was about to descend into a depression. A report on the latest Consumer Price Index (CPI) from the Bureau of Labor Statistics (BLS) and inventory reports all show prices could start decreasing, though, and we’re already seeing automakers like Tesla make changes.

According to the latest CPI report, over the last 12 months, the CPI for all spending was up by 6.6 percent through November of 2022. But by December of 2022, the overall index had begun to decline by 0.1 percent. It doesn’t sound like a huge drop, but this is accounting for all spending, from food to energy to homes and vehicles both new and used. December was also the smallest 12-month increase since October of 2021 and was also the smallest increase in the CPI when compared to November of 2022 and seasonal adjustments between each month.

We’re Paying Less at the Pump, but Not To Power Our Homes

The biggest factor in our increased spending has been energy costs. The CPI report explained that it was the single biggest contributor to the rise, showing a 7.5 percent increase back in June of 2022 for all energy while gasoline (of all types) saw a 11.2 percent increase on its own. However, by the time that December rolled around, energy costs overall saw a drop of 4.5 percent while gasoline’s CPI saw a drop of 9.4 percent.

That wasn’t even the biggest drop we saw at the pump. Just after that June high of an 11.2 percent increase, we saw an immediate decrease in July to a drop of 7.7 percent and falling further to a 10.6 percent decrease in August. Overall, our fuel spending has decreased by 1.5 percent over the 12 month period that ended in December of 2022.

It’s not all fuels that have seen a decrease. The overall energy index is still up by 7.3 percent thanks to fuel oil going up by 41.5 percent, electricity costs going up by 14.3 percent, and piped-in utility gas service going up by 19.3 percent over the last 12 month period. So while gasoline has gone down in price, the energy costs to power everything else continues to contribute to our increased spending in energy.

While all food spending ended up at 10.4 percent higher than the previous 12 month report, the month per month increase dropped from a high of one percent in July of 2022 to a 0.3 percent increase by December 2022. When you single out getting groceries versus going out to eat, getting food to have at home was the biggest factor on our spending increases with a high of 1.3 percent higher in July to a low of 0.2 percent higher by December.

Meanwhile, going to a restaurant decreased, with a high increase in August of 0.9 percent that stayed steady until November where it began to drop, first to an increase of 0.5 percent when compared to October, then to a 0.4 percent increase by December. It should also be noted that the BLS did not adjust the “Food Away from Home” category for seasonal changes between each month in this CPI report.

President Biden credited the Inflation Reduction Act in a speech given on Thursday saying to the press, “It all adds up to a real break for consumers, real breathing room for families and more proof that my economic plan is working.”

Interest Rates Will Also Continue to Decrease in Rate Hikes

More good news is that buyers that are able to take new loans on big purchases will be able to enjoy lower interest rates. With inflation worries continuing to de-escalate, the Federal Reserve has said that rate increases have slowed back in December and there may be some dialing back on rates by February, potentially as little as 25 basis points at a time. In a speech on Thursday, Patrick Harker, president of the Federal Reserve of Philadelphia said, “I will expect that we will raise rates a few more times this year, though, to my mind, the days of us raising them 75 basis points at a time have surely passed. In my view, hikes of 25 basis points will be appropriate going forward.”

Rate hikes were also a point that Jessica Caldwell, executive director of insights at Edmunds, told the New York Times that could stagnate new car sales. “For over a decade, low interest rates have helped people buy the big cars that Americans like,” she said; “Low rates from the Fed are what made those attractive offers for zero-percent financing and 72 month loans possible, but with the higher rates, it’s a pretty unfriendly market for people buying a car.”

Vehicle Spending Costs

Lower costs to fuel spending and a decrease in interest rate hikes are all good news for car buyers, but that’s not the only bit of news they will like. Unless you have stayed away from a dealership as much as you can, new vehicle prices have actually decreased according to the CPI report. While the overall amount you’ll spend on a new car is still up by 5.9 percent from 12 months ago, the rate of that increase has fallen. A high of a 0.8 percent increase in August of 2022 was now a decrease of 0.1 percent by this past December. This decrease started nearly immediately after that, dropping to 0.7 percent by September but really came to a head back in October where it was only a 0.4 percent increase. By November there was no change in spending prices at all.

Used vehicles have seen an even more dramatic pricing change according to the CPI. Back in June, the price of a pre-owned car or truck was 1.6 percent higher than May, but immediately, that changed. Used vehicles saw a 0.4 percent decrease in price to a huge drop of 2.4 percent by October, a 2.9 decrease in November, and another decrease of 2.5 percent in December. Overall, the price of a used vehicle has dropped 8.8 percent over the previous 12 month CPI reporting period. This is very good news for low-income and lower middle class vehicle buyers who aren’t the ones desperately looking for a new car, but those that are simply looking to replace their aging wheels with something a little bit newer.

Fuel isn’t the Only Contributor to New Car Prices

While the price is still higher than the previous 12 month CPI period, the decrease is not only good news but also due to supply chain and semiconductor issues finally being solved. According to Cars.com, new vehicle inventories are increasing as well as the time a new vehicle stays on a dealer’s lot. According to their latest report this week, there are now 1.4 million new cars on dealer lots. This is a 31 percent increase when compared to May of 2022 and 40 percent higher than November of 2021. But this number is still below numbers seen in 2019, which saw as much as 3.2 million in November of that year and showing we’re still down as much as 57 percent versus pre-Pandemic new car inventories.

The additional amount of new cars also means that they are staying on dealer lots for much longer. Of new vehicles that are on dealer lots, 47 percent are sold within 10 days, which is down from 57 percent back in March of 2022. This also means that the average time a new vehicle stays on a dealer’s lot is up, with a new average of 23 days versus 18 days from 2021.

Cars.com states that, within its dealer networks, new vehicles were on their lots for up to 44 days in November 2022 versus 39 days the year prior. Despite the increased inventory of Cars.com’s network of dealers, the median price for all new vehicles was $41,000, which is up six percent in November versus 2021 at $38,800.

The good news is that, according to Sam Fiorani at AutoForecast Solutions in an email to Cars.com, prices should start coming down in 2023 due to that increased supply. “Consistent demand for new vehicles and a limited supply of product allowed dealers to sell at or above MSRP,” he said, “With more supply and potentially less demand, prices in 2023 should begin to slip.”

When compared to a report from Cox Automotive and its network of vehicle dealers, they claim that inventories climbed to 1.8 million vehicles versus 1.62 million in November. Their report also suggests that dealers have a 58 day supply, which is 65 percent higher than December 2021 (60 days supply is considered normal and ideal). Their average listing price is up, hitting as high as $47,662 and up from just one year ago, but the pace of sales has improved by just two percent.

“If this trend continues—and it seems likely to do so—automakers will be under heavy pressure to move metal with higher incentives,” said Charlie Chesbrough, Cox Automotive’s senior economist; “This will be the story to watch for in the first part of 2023—automakers returning to discounting.” Let’s hope this will be the case because new car prices have been out of control for far too long. This week, Tesla has already slashed prices for its Model 3 sedan and Model Y Performance SUV.

Source: Read Full Article