Few cars, lots of customers: Why autos are an inflation risk
By Jeanna Smialek
Corina Diehl is eager for more sedans and pickup trucks to sell her customers in and around the Pittsburgh area, but as the pandemic enters its third year, cars remain in short supply, and the squeeze on inventory shows no sign of abating.
“If I could get 100 Toyotas today, I would sell 100 Toyotas today,” Diehl said. Instead, she said, she’s lucky to have three. “It’s the same with every brand I have.”
Dealerships like Diehl’s are wrestling with inventory shortages — the result of a dearth of computer chips, production disruptions and other supply-chain snarls. That’s not a problem just for car buyers, who are paying more; it’s also a problem for economic policymakers as they try to wrestle the fastest inflation in four decades under control.
Car prices have helped push inflation sharply higher over the past year, and economists have been counting on them to level off and even decline in 2022, allowing the rising consumer price index to moderate markedly.
But it is increasingly unclear how much and how quickly car prices will slow their ascent, because of repeated setbacks that threaten to keep the market under pressure. While price increases are showing some early signs of slowing, and used-car costs, in particular, are unlikely to climb at the same breakneck pace as last year, continued shortfalls of new vehicles could keep prices elevated — even rising — longer than many economists expected.
“We’ve stumbled into another pattern of a series of unfortunate events,” said Jonathan Smoke, chief economist at Cox Automotive, an industry consulting firm. Shutdowns meant to contain the coronavirus in China, computer chip factory disruptions tied to a recent earthquake in Japan, the aftereffects of the trucker strike in Canada and the war in Ukraine are adding up to slow production.
Smoke expects new-car prices to keep rising this year — perhaps even at nearly the same pace as last year — and used cars to begin to depreciate again but said the shortage of new cars could spill over to blunt that weakening. And used cars may not fall in price at all if rental companies begin to snap them up as they did in 2021.
“If the supply situation gets worse, it’s still possible that we repeat some of what we had last year,” he said.
Smoke’s predictions — and worries — are more grim than what many economists are penciling into their forecasts.
Alan Detmeister, a senior economist at UBS and former chief of the Federal Reserve Board’s wages and prices section, said he expected a 15% decline in used-car prices by the end of the year, with new-car prices falling 2.5% to 3%.
Those estimates are predicated on an increase in supply.
“This is a huge wild card in the forecast,” Detmeister said. But even if production doesn’t pick up, “it is extremely unlikely that we’ll see the kind of increases we saw last year,” he added, referring to prices.
Automakers are struggling to ramp up production. Russia’s invasion of Ukraine has created shortages in electrical components needed for cars, prompting S&P Global Mobility to cut its 2022 and 2023 forecasts for U.S. production. More critically, the chips needed to power everything from dashboards to diagnostics remain in short supply. Ford Motor and General Motors temporarily shut down some U.S. factories last week because of supply issues, and the industry broadly cannot ship as many cars as customers want to buy.
In cars, “production remains below pre-pandemic levels, and an expected sharp decline in prices has been repeatedly postponed,” Jerome H. Powell, the Fed chair, said during a speech last month. He noted that while supply-chain relief in general seemed likely to come over time, the timing and scope were uncertain.
Analysts had been hoping that chip shortages, in particular, would ease up, but “we’ve got at least another year, if not more,” for the supply chain to heal, said Chris Richard, a principal in the supply chain and network operations practice at consulting firm Deloitte.
While smaller electronics producers may be able to find enough semiconductors, he said, cars contain hundreds or even thousands of chips — often different kinds — and many auto companies do not have direct and close relationships with their providers.
Car buying could begin to slow as the Fed raises interest rates, making car loans more expensive, but so far there is little sign that is happening. In fact, demand has been so strong that automakers have been cracking down on dealers that charge above list price, threatening to withhold fresh inventory.
“I don’t see the prices subsiding. You don’t need them to subside,” said Joseph McCabe at AutoForecast Solutions, an industry analyst, explaining that dealer costs are increasing and companies want to protect their profits. “Prices will go up, and there will be less negotiating space for consumers, because there’s high demand and no availability.”
McCabe does not think that car inventory will ever fully rebound: Dealers and automakers have learned that they make more money by effectively making cars to order and running with learner inventory. If that’s the case, the permanently restrained supply could have implications for the rental and used-car markets.
If car prices keep climbing briskly, it will be hard for inflation overall to moderate as much as economists expect — to around 4% to 4.5% as measured by the consumer price index by the end of the year, according to a Bloomberg survey, down from 7.9% in February.
That’s because prices for services, which make up 60% of the index, are also climbing robustly. They increased 4.8% in the 12 months through February and could remain high or even continue to rise as labor shortages bite.
Of the goods that make up the other 40% of the index, food and energy account for about half. Both have recently become markedly more expensive and, unless trends change, seem likely to contribute to high inflation this year. That puts the onus for cooling inflation on the products that make up the remainder of the index, like cars, clothing, appliances and furniture.