As a result of shortages caused by pandemic-related supply chain issues, fewer new cars were available in 2021 and prices surged as a result. But the used car market saw even more disruption as consumer demand for used cars soared — since March 2020, Yahoo Finance reports, used car prices are up 39.8% according to the U.S Bureau of Labor Statistics’ Consumer Price Index. Compare this to an increase of 8.9% in new car prices and an average U.S. inflation rate of 6.3%.
Even toward the end of 2020, prices were still on the rise with the average purchase price of cars increasing by $100 to $200 a week, according to Jim Lyski, executive vice president and chief marketing officer for CarMax. Clearly, it was an unprecedented year for used car vehicles.
Why Are Used Car Prices So High?
At the start of the pandemic, automotive production dropped significantly, dropping 99% in April 2020 compared to February 2020, according to the U.S. Bureau of Economic Analysis. While the industry appeared to recover during the summer of 2020, shortages and delays caused by global supply chain issues caused production to drop again — by 23% in 2020 and a predicted 8% in 2021.
In addition to a shorter supply of vehicles, increased demand has also contributed to higher prices. This demand was caused partially by rock-bottom auto loan interest rates as well as increased private vehicle sales for people moving out of urban areas and no longer using public transportation due to health and safety concerns.
The Outlook for 2022
Until supply chain issues are solved and automotive production returns to normal, the law of supply and demand will continue to keep vehicle prices high.
Supply chain issues won’t be easy to work out, as U.S. production depends largely on chip and semiconductor production in Asia. Dan Hearsch, a managing director in the automotive and industrial practice at AlixPartners, told Fortune magazine: “It’s a shortage of individual components, which is caused by a shortage of semiconductors, shortages of labor, allocation of steel and resin…There’s lots of disruption.” He adds that shipping delays “are the biggest weak spot at this point.”
In fact, the Financial Times reports that the chip shortage specifically could last into 2023. Experts in the Fortune article referenced above believe the used car market won’t likely return to normal until well into 2022 or beyond. Specifically, Jonathan Smoke, chief economist at Cox Automotive, has forecasted that used car prices will continue to rise through the first half of 2022 followed by a small price pullback in the second half of the year.