Few cars, many customers: Why cars are a risk factor for inflation

Corina Diehl is looking forward to more sedans and trucks to sell to customers in and around the Pittsburgh area, but as the pandemic enters its third year, cars remain in short supply and stockpiles show no signs of receding.

“If I could get 100 Toyota today, I would sell 100 Toyota today,” Diehl said. On the contrary, he said, she is lucky to have three. “It’s the same with every brand I have.”

Dealers like Diehl’s struggle with stock shortages – the result of computer chip shortages, production disruptions and other supply chain cries. This is not just a problem for car buyers, who pay more. It is also a problem for economic policymakers as they try to tackle the fastest inflation of the last four decades under control.

Car prices helped boost inflation sharply last year, and economists rely on them to balance or even decline in 2022, allowing the rising consumer price index to ease significantly.

However, it is becoming increasingly unclear how and how quickly car prices will slow down due to repeated setbacks that threaten to keep the market under pressure. While price increases show some early signs of slowing down and used car costs, in particular, are unlikely to rise at the same dizzying rate as last year, continuing shortages of new vehicles could keep prices high — even more so. than many economists expected.

“We have stumbled upon another pattern of a series of unfortunate events,” said Jonathan Smoke, chief economist at Cox Automotive, an industrial consulting firm. Shutdowns aimed at reducing coronavirus in China, shutdowns at a computer chip factory linked to a recent earthquake in Japan, the aftermath of a trucker strike in Canada and the war in Ukraine add to slow production.

Smoke expects new car prices will continue to rise this year – perhaps even at almost the same rate as last year – and used cars will start to depreciate again, but said the shortage of new cars could be exacerbated to mitigate this. weakening. And used cars may not fall in price at all if rental companies start buying them as they did in 2021.

“If the supply situation worsens, it is still possible to repeat some of what we had last year,” he said.

Smoke forecasts – and worries – are more bleak than many economists think in their forecasts.

Alan Detmeister, senior economist at UBS and former head of the Federal Reserve Board’s payroll and pricing department, said he expects a 15% drop in used car prices by the end of the year, with new car prices falling 2.5% to 3%.

These estimates are based on an increase in supply.

“This is a huge wilderness in forecasting,” Detmeister said. But even if production does not rise, “it is extremely unlikely that we will see the kind of increase we saw last year,” he added, referring to prices.

Omair Sharif, founder of Inflation Insights, a research firm, said he was still expecting improved supply and slower demand to help the used car market balance. While used car prices may rise for a few months as households spend tax refunds on cars, he expects the increase to be modest in part because they are already almost in line with new car prices.

“I would be shocked if the used car market really accelerated,” he said. New car prices are a more complicated story, he added: “There, we have legitimate serious stock problems.”

Automakers are struggling to increase production. Russia’s invasion of Ukraine has created shortages of electrical components needed for cars, with the result that S&P Global Mobility has reduced its forecasts for 2022 and 2023 for US production. More importantly, 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. plants last week due to supply problems, and the industry generally cannot ship as many cars as customers want.

In cars, “production remains below pre-pandemic levels and the expected sharp drop in prices has been repeatedly postponed,” Jerome H. Powell, the Fed’s chairman, said in a speech last month. He noted that while relieving the supply chain generally seemed likely to come over time, the timing and scope were uncertain.

Analysts had hoped that chip shortages, in particular, would be reduced, but “we have at least another year, if not more,” to heal the supply chain, said Chris Richard, head of supply chain and network. business practice at Deloitte Consulting.

While smaller electronics manufacturers may be able to find several semiconductors, he said, cars contain hundreds or even thousands of chips – often different types – and many car companies do not have direct and close relationships with their providers.

The earthquake in Japan temporarily closed the chip factories that supply the automobile industry, costing a few weeks of production in one. Chip manufacturing requires neon, and much of it comes from Ukraine. Lockdowns in Shanghai may reduce chip production in some Chinese factories.

At the same time, demand is growing. Ford reported a record number of retail vehicle orders in March, including F-Series trucks, which remained in demand despite rising gas prices.

Car purchases could begin to slow as the Fed raises interest rates, making car loans more expensive, but so far there is little sign that this is happening. In fact, demand has been so strong that automakers are hitting dealers who charge more than the list price, threatening to withhold new stocks.

“I do not see prices falling. “They do not have to back down,” said Joseph McCabe, an industry analyst at AutoForecast Solutions. “Prices will go up and there will be less bargaining space for consumers, because there is a lot of demand and there is no availability.”

McCabe does not believe the car stock will ever fully recover: Dealers and automakers have learned that they make more money by efficiently ordering cars and operating with a student stock. If this happens, the permanently limited supply could have an impact on the rental and used car markets.

If car prices continue to rise rapidly, it will be difficult for inflation as a whole to moderate 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 survey by Bloomberg, down 7.9% in February.

This is due to the fact that prices for services, which constitute 60% of the index, are also rising sharply. They rose 4.8% in the 12 months to February and could remain high or even continue to rise as labor shortages sting.

Of the goods that make up the other 40% of the index, food and energy account for about half. Both have recently become significantly more expensive and, unless trends change, seem likely to contribute to high inflation this year. This puts the burden of reducing inflation on products that make up the rest of the index, such as cars, clothes, appliances and furniture.

While changes in the Fed’s policy could reduce demand and ultimately slow prices, policymakers and economists hoped to get some physical help as supply chains for cars and other goods came out on their own.

“We are still waiting for some deflation in goods,” said Laura Rosner-Warburton, an economist at MacroPolicy Perspectives. She said she was waiting for fuel prices to ease and that her call included some “moderate reductions” in vehicle prices.

It is not just economists who hope that forecasts for supply recovery and more mediocre car prices will come true. Buyers and sellers alike are desperately looking for more vehicles. Pittsburgh-based Diehl sells brands including Toyota, Volkswagen, Hyundai and Chevrolet, and its companies have said inventory could begin to recover by the end of the year – a suspension that seems far-fetched.

Her customers are hungry for trucks, electric vehicles and anything else she can get her hands on. When one of its dealerships mentions a new car on its website at night, a buyer will show up first thing in the morning, he said. Its dealerships have 400 to 500 spare parts to repair cars, from 10 to 20 before the pandemic.

“It’s absolute insanity at its best,” Diehl said. “I do not see abundant stocks before 2023 and 2024.”

This article was originally published in the New York Times.

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