Car prices have accelerated in recent months, as with many other consumer goods. According to figures from data analytics firm J.D. Power, the average price paid for a new vehicle in the U.S. was up 4.2% year-over-year in January 2023. Combined with soaring gasoline prices and interest rates, this is making car ownership more onerous and putting the brakes on auto sales.
In this report, J.P. Morgan Research examines why car prices are rising, how inflation is impacting car sales trends and when car prices are expected to drop.
Car prices rose dramatically in 2022 as a result of global supply chain issues, with a persistent chip shortage holding up production in the auto industry. While semiconductor supply is expected to improve in 2023, new car prices will likely remain elevated due to inflationary input costs.
U.S. consumers forked out an average of $46,437 for a new vehicle in January 2023, marking a year-over-year increase of 4.2%, according to data from J.D. Power. This is an all-time high for the month of January and indicates no real relief from 2022’s record prices.
“We estimate that half of the increase in new vehicle prices relates to the passing along of higher input costs,” said Ryan Brinkman, Lead Automotive Equity Research Analyst at J.P. Morgan. “There’s still a lot of inflation bubbling up in the new vehicle supply chain. Even though raw material costs are falling, suppliers have a lot of other higher non-commodity costs — diesel, freight, shipping, logistics, labor, electricity — to pass on to automakers.”
Source: J.D. Power
The shortage of new cars has fueled demand for used cars, causing prices for the latter to surge. Inflationary pressures have also trickled down to the used car market, where average prices continue to track at around 30% above pre-pandemic levels.
“Used vehicle prices and new vehicle prices exist in a sort of feedback loop,” said Brinkman. Fewer new vehicles on the road mean there are fewer second-hand vehicles to trade in, straining used car inventories. And like new vehicles, used vehicles are sensitive to changes in commodity prices too, as these affect their scrap value.
While new car prices reached an all-time high in December 2022 and are likely to remain above pre-pandemic levels, prices will ease slightly this year.
“We currently estimate the average transaction price of a new vehicle in the U.S. to decline by around 2.5% to 5% year-over-year in 2023, supported by increasing inventory availability as supply constraints ease and as automakers produce more lower-end models equipped with fewer high-end features. This represents a more normal mix relative to the past several years, when the preference was for the production of high-end models,” noted Brinkman.
In addition, commodity costs are on the whole tracking lower than expected, driven by declining prices for synthetic rubber, cold rolled steel and stainless steel. According to J.P. Morgan Research’s weighted index of the commodities used to produce an automobile, costs may average 24% lower in 2023 compared with 2022. “The latest spot prices now suggest an ever bigger full-year tailwind for the auto industry in 2023,” said Brinkman.
However, lower new vehicle prices may not translate into higher demand, especially in light of recent interest rate hikes. According to data from J.D. Power, average interest rates for new vehicle loans increased to 6.79% in January 2023, 264 basis points (bp) higher than a year ago.
“80% of Americans who finance or lease their vehicle may not experience any relief, given that a 100 bp rise in interest rates translates into an approximately $20 increase in monthly cost for the average $45,000, 72-month loan,” noted Brinkman. “This potentially offsets the impact of lower vehicle prices.”
In the U.S., the Manheim Used Vehicle Value Index peaked at 257.7 in December 2021 and January 2022. It fell to 222.5 in January 2023.
In the used car market, prices are already starting to drop as the market cools, having seemingly peaked earlier in 2022. “Outside of near-term consumer slowdown, we believe a ramp-up in new vehicle production and subsequent dealer inventory build-up toward normalized levels are likely to be the key drivers of used car pricing reversion,” said Brinkman.
In the U.S., the Manheim Used Vehicle Value Index — which measures the prices dealerships pay for used cars at auctions — hit a high of 257.7 in January 2022 and has since fallen to 222.5 in January 2023. Overall, J.P. Morgan Research predicts used car prices will decline by roughly 10% in 2023.
Auto sales are being hampered by record new vehicle pricing, declining used vehicle trade-in values and higher interest rates, which are together negatively impacting affordability.
Rising sticker prices have dampened consumer demand for new and used cars alike, and sales have plummeted as a result.
J.P. Morgan Research expects the seasonally adjusted annual rate (SAAR) of U.S. light vehicle sales to track 14.0 to 14.5 million in 2023 — a modest improvement from 13.9 million in 2022, but well below the 17.0 million sold pre-pandemic in 2019.
“There is demand destruction taking place,” said Brinkman. “We continue to believe auto sales are being hampered by record new vehicle pricing, declining used vehicle trade-in values and higher interest rates, which are together negatively impacting affordability.”
In the used car market, sales are expected to fall by a further 1% in 2023, as estimated by software company Cox Automotive. “This is driven by the high prices and historically poor selection that has been plaguing the industry but is likely now joined also by declining demand,” said Brinkman. “A deteriorating macro outlook is weighing on consumer sentiment and keeping potential buyers out of the market.”
Overall, the auto industry will continue to experience a “lower volume, higher price” dynamic stemming from the pandemic and its aftermath. “The road to recovery may be less rapid and less linear than earlier thought,” said Brinkman. “However, 2023 has greater potential for a more rapid improvement in the volume environment and a more rapid normalization in pricing, with the wildcard being an economic downturn.”
J.P. Morgan’s Research team leverages cutting-edge technologies and innovative tools to bring clients industry-leading analysis and investment advice.
This communication is provided for information purposes only. Please read J.P. Morgan research reports related to its contents for more information, including important disclosures. JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively, J.P. Morgan) normally make a market and trade as principal in securities, other financial products and other asset classes that may be discussed in this communication.
This communication has been prepared based upon information, including market prices, data and other information, from sources believed to be reliable, but J.P. Morgan does not warrant its completeness or accuracy except with respect to any disclosures relative to J.P. Morgan and/or its affiliates and an analyst's involvement with any company (or security, other financial product or other asset class) that may be the subject of this communication. Any opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This communication is not intended as an offer or solicitation for the purchase or sale of any financial instrument. J.P. Morgan Research does not provide individually tailored investment advice. Any opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. You must make your own independent decisions regarding any securities, financial instruments or strategies mentioned or related to the information herein. Periodic updates may be provided on companies, issuers or industries based on specific developments or announcements, market conditions or any other publicly available information. However, J.P. Morgan may be restricted from updating information contained in this communication for regulatory or other reasons. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.
This communication may not be redistributed or retransmitted, in whole or in part, or in any form or manner, without the express written consent of J.P. Morgan. Any unauthorized use or disclosure is prohibited. Receipt and review of this information constitutes your agreement not to redistribute or retransmit the contents and information contained in this communication without first obtaining express permission from an authorized officer of J.P. Morgan.