DETROIT ‒ Sticker shock triggered pointed comments in President Joe Biden’s State of the Union address Tuesday when the president took a tiny jab at carmakers by saying “one-third of all the inflation is because of automobile sales.”
“There weren’t enough semiconductors to make all the cars that people wanted to buy,” Biden said.
“And guess what? Prices of automobiles went way up, especially used vehicles as well.”
Biden then suggested that what’s needed is to lower costs, not wages, and make more cars and semiconductors in America.
Where prices really took off, of course, was on used car lots. Many consumers turned to used cars when their dream new car or truck cost too much or the new model wasn’t readily available at the dealership, thanks to the semiconductor shortage that hit assembly lines. Demand took off as jobs returned and stimulus checks helped fuel car sales, too.
Even so, I was kind of shocked to hear Biden blame car sales for inflation. Not cereal? Not high prices at the pump? But then my “new” SUV – which I hardly drove in the last two years since working remotely during the pandemic – is now 7 years old and doing just fine. (In the past 11 months, I have driven less than 3,000 miles.)
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Wow, nearly $650 a month for a car payment?
Paying top dollar for bigger, more expensive SUVs and trucks, not surprisingly, is forcing drivers to hand over more than ever each month to cover their car payments.
Drivers who bought vehicles late last year paid a record average of $644 a month for their loan payments in the fourth quarter last year, according to new data from Experian’s State of the Automotive Finance Market.
That’s up 11% from $579 a month just year ago.
Any way you look at it, it’s a ton of money for people to be paying for a car or truck each month.
For used cars and trucks, average payments skyrocketed to $488 a month for vehicles bought in the fourth quarter – up 17% from $417 for the same time in 2020.
Consumers are taking on more debt, too.
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The average new vehicle loan amount grew 12% year-over-year to $39,721 for loans originated in the fourth quarter up from $35,421 in the same period a year earlier.
Average used car loans jumped 20% to hit $27,291 in the fourth quarter last year, up from $22,630 in late 2020.
Two things are happening: Many people are buying more expensive new SUVs so they take out bigger loans. And many car buyers are stuck paying more than sticker price when there are very limited car inventories, thanks to the chip shortage.
Melinda Zabritski, Experian’s senior director of automotive financial solutions, said on average the manufacturer’s suggested retail prices on new vehicles were up 4% year over year during the fourth quarter while loan amounts were going up 12%.
Loan amounts are overinflated to the value on these vehicles.
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Anyone she’s talked to personally who has bought a new car is paying above the sticker price and finding little room for negotiating.
In January, for example, 8 out of 10 new car buyers paid above sticker price, according to Edmunds.com. That compares with just 2.8% of new car buyers paying above sticker in January 2021 and 0.3% in January 2020.
Blame inventory shortages and strong consumer demand, particularly from well-off consumers who have excellent credit and are able to qualify for bigger loans.
“Today’s market is just unprecedented with all the inventory shortages,” Zabritski said.
At one point, many thought the inventory crunch could improve in mid-2022 but now, she said, many experts believe that inventory problems could last another year or two.
Right now, consumers are making their car payments, thanks to low unemployment rates.
Delinquency “rates are still significantly under those of 2019, which is a positive sign, overall,” Zabritski said.
Monitoring how well consumers will be able to pay those bills in the future is going to be key – especially given the higher loan amounts and monthly payments. Will they be able to keep it up? And what happens if they want to buy a new vehicle soon but their loan far exceeds the value of that car, limiting their options?
Who’s left behind?
No doubt, many families of modest means are being priced out of the new car market – and now even the used car market as the price of used cars has skyrocketed.
“I’m particularly concerned about entry level buyers who need these vehicles to get to work or to get their kids,” said Patrick Anderson, C
EO of Anderson Economic Group, based in East Lansing.
“Many of these buyers would have trouble qualifying for a loan or to put a substantial amount down.
“You have people who are simply going without cars that they want to buy.”
The Anderson Group noted in a report in January that it’s been decades since used car prices increased this dramatically.
The average new vehicle price was $47,077 in December, up from $41,335 in December 2020, according to the group’s research.
Even after modest raises, though, people would need to work three more weeks to keep up with higher new car prices.
It would take 43 weeks of average earnings to afford that car in December – up from 40 weeks a year ago, according to the Anderson Group.
That’s based on average weekly earnings of $1,085.42 in December – up nearly 4.9% from $1,034.75 a year ago.
Things were only worse for used car buyers who had to work five weeks more to buy the typical used car.
“You have people who are just plain priced out of the market. They can’t afford to buy the car,” Anderson said.
Even those who can afford a car may delay buying after walking onto nearly empty car lots and seeing outrageous prices.
Anderson did a double take himself when shopping for a used truck in November and decided to abandon purchasing one for now.
Still, he said, inflation isn’t being fueled by car sales.
“Cars aren’t causing inflation any more than meatpackers are,” Anderson said.
Instead, he said, broad based inflation is caused by a variety of policies by the federal government, including a soaring federal budget deficit, easy money policy by the Federal Reserve and ongoing stimulus spending.
The economic shock relating to the pandemic in 2020 triggered Depression-level unemployment, Anderson said. That made it necessary to take action in 2020, including early efforts to expand jobless benefits and offering loans to struggling businesses. But he said ongoing excess spending in 2021 fueled inflation.
“We are literally borrowing and sending checks to people who then spend it,” Anderson said.
The stimulus packages out of Washington left many families with more cash to spend, driving the demand for many goods. What they could buy ended up being restricted because travel and entertainment was limited during much of the pandemic. Supply chain disruptions only made matters worse.
Was Biden on the money when talking about cars, trucks, inflation?
It is hard to imagine that one-third of the blame for personal budgets getting blown up can be attributed to car prices.
We’ll get a new round of data on Thursday when the U.S. Bureau of Labor Statistics releases the U.S. consumer price index for February.
But some economists say Biden’s one-third comment isn’t off the mark if you look at how auto price hikes contributed to the inflation index. Still, Biden’s comments left me wondering how to split up the rest of the blame. What was he leaving out?
Omair Sharif, founder and president of Inflation Insights in Pasadena, California, broke down some of the numbers for me to examine the change in the rate of inflation. His firm provides inflation analysis and forecasting to institutional clients who trade inflation products.
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The CPI in February 2020 – before the pandemic when no one was talking about inflation – was a modest 2.33%.
The CPI in January 2022 – when everyone noticed they were paying way too much for bacon and burgers – jumped 7.5% over the last 12 months.
Together, he said, higher prices for both used and new auto sales accounted for about 29.1% of the change in inflation rate over a two-year period from February 2020 to January 2022.
During that time frame, used car prices were up 40.5% and new car prices were up 12.19%
Another set of numbers that Sharif supplied proved quite interesting, too.
We eat every day so we’re likely to focus a lot more on rising food prices than car prices even in the Motor City. But the food category, Sharif said, was responsible for only about 14% of the rise in inflation.
And, really, car sales aren’t exactly the No. 1 culprit when it comes to inflation reaching levels it hasn’t seen in 40 years.
Energy as a whole made up 30.7% of the rise in inflation in that two-year time frame, he said.
When it comes to energy, the pain at the pump accounted for 21.3% of the move in total CPI from February 2020 through January 2022.
Autos, energy and food together contributed 73.6% to the change in inflation over the last two years, Sharif said.
Steve Reed, an economist with the Bureau of Labor Statistics, told the Free Press that a little under a quarter of the 7.5% year-over-year jump in the CPI for January comes directly from vehicles. That includes changes in new car prices, used car prices, and car and truck rental.
But Reed noted that the spike in car prices is more than a third of what is sometimes called core inflation, which excludes changes in more volatile food and energy costs. Core inflation is running at 6% rather than 7.5%.
Higher gasoline prices accounted for about one-sixth of the jump in the CPI year over year, Reed said.
“Gasoline can also have an important indirect effect, as it increases the cost of transporting goods and tends to make them more expensive,” he said.
“It is likely that some of the price increase in other categories is attributable to gasoline rising, though it is hard to precisely quantify how much.”
Oil prices surged above $109 a barrel Wednesday for West Texas Intermediate as global markets are shunning Russian oil since the Russia launched a full-scale invasion of Ukraine on Feb. 24.
Biden announced Tuesday that the United States worked with 30 other countries to release 60 million barrels of oil from reserves around the world.
“These steps will help blunt gas prices here at home,” he said.
But prices at the pump aren’t likely to tumble – much like car prices – anytime soon. Even if you’re not in the market to buy a car, you’ll have plenty to grumble about when it comes to how fast money is leaving your wallet.