Used Car Inflation: Where are We Headed?

August 16, 2022

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Used Car Inflation: Where are We Headed?

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Inflation affects everything from gas to groceries. And yes, even the used automotive market. But this time, rising used car prices are a key contributor to inflation.

Between the COVID-19 pandemic, the semiconductor chip shortage last year, and the war in Ukraine, the new vehicle supply chain has been backed up for years now. Reserves continue to be low as the demand for new vehicles is high. That, coupled with significantly elevated new car prices has consumers turning to used cars. 

However, the used car market is not much better. Just how inflated are used car prices? Prices are up 42.5% from normal levels.1 The supply of used vehicles is also low, as consumers are keeping cars longer than ever. Customers that may have traded their used vehicles in the past, now want a few more years of life from them. 

But what does inflation mean for your automotive dealership and what can you do about it? 

Why is Used Car Inflation so High?

The used car inflation rate is caused by a few things. But ultimately it all boils down to supply and demand. Automakers’ new vehicle supply chains are still backed up from 2020, creating scarcity. This pushes consumers who want a new car to consider a used one. But with the increased demand, comes short supply. 

Customers that would usually trade in their used cars are keeping them longer. And they aren’t the only ones. With supply low, fleet rentals are slow to turn over their inventory, further reducing used car availability. This means dealerships have even less supply of used cars. However, car buying hasn’t slowed, as the demand is still high.

Inflation Declines Summer 2022

For the first time in two years, dealerships are starting to negotiate vehicle prices. This alone marks a turning point. Throughout 2021 and 2022 vehicles have demanded as much as  $10,000 above sticker price. Does this mean inflation is falling? 

Yes. Inflation is finally beginning to decline–at least in some categories. Used vehicle prices and gas prices are down. But groceries and other supplies are still experiencing price increases. Overall inflation is at a 41-year record high according to the consumer price index.2

Inflation Projections for Fall 2022 and Beyond

Economists project that used car price inflation will get better in the tail end of 2022 and early 2023. However, because used car inflation is so intertwined with the economy as a whole, it’s not guaranteed. 

The Federal Reserve is fighting inflation by increasing interest rates. Ideally, this means fewer people take out housing and auto loans, thereby reducing consumer spending. This move should slow the ever-growing inflation rates. 

However, there’s always the risk that the economy cools too quickly. If demand drops too abruptly because of the interest rate hike, then production and employment levels may drop to match. While this would cool the economy, it could also spur a recession due to subsequently high unemployment and interest rates. 

How Inflation Affects Vehicle Depreciation 

Used cars aren’t depreciating at standard rates anymore. Depreciation used to be about 20% in the first year and 10% over the next five years. Now, used cars are worth more than ever. Trade-in vehicles are worth an average price of nearly $10,000 more than their depreciated value.3 

Dealerships should be mindful of high prices when buying trade-ins from customers. Make sure the offer is realistic to your budget, not just to the current market.  Take care to ensure you’re buying confidently and choosing cars you can sell for a profit.

What Dealers Should Keep in Mind

As inflation declines slowly, dealerships should still watch their inventory. This isn’t the time to hastily snap up vehicles in anticipation of a return to normal. It’s time to carefully take the proper next steps. Savvy dealers will want to focus on strategic sourcing and mindful selection.

Keeping vehicles in stock that aren’t selling fast can hurt your bottom line, especially with high inflation. Turning inventory over fast is a major way for dealerships to cut holding costs. There are three major ways for dealerships to do this. 

Stock Your Dealership With ACV

Inflation may be falling, but it’s falling slowly. The used car market isn’t getting better overnight and we may not see normal prices for years. Dealerships need to prioritize cars that will sell fast. While used car scarcity is a nationwide problem, we live in an age where trade-ins aren’t the only way to stock used cars. Dealers can buy auction cars online.

ACV has a wide range of wholesale vehicles available at the click of a button. We look forward to working with you at ACV Auctions! Start finding great inventory by registering! 

Sources

  1. Business Wire. “After More Than a Year of Unprecedented Price Inflation, Used Car Market Beginning Its Road Back to Normal” Retrieved July 2022 from https://www.businesswire.com/news/home/20220606005767/en/After-More-Than-a-Year-of-Unprecedented-Price-Inflation-Used-Car-Market-Beginning-Its-Road-Back-to-Normal
  2. MarketWatch. “U.S. inflation climbs to new 41-year high of 9.1%, CPI shows, as gas prices surge” Retrieved July 2022 from https://www.marketwatch.com/story/coming-up-consumer-price-index-for-june
  3. Cars.com. “Should You Buy Now or Wait to Save on a Car?” Retrieved July 2022 from https://www.cars.com/articles/inventory-shortage-buy-now-or-wait-to-save-on-a-car-451134/