Why car prices remain so stubbornly high

Relief from record high auto prices could be coming soon. But that doesn’t mean those prices will go back to where they were before the pandemic.

A shortage of necessary parts — primarily computer chips — limited production of new vehicles around the globe. That left car dealers short of supply to meet demand, allowing them to charge a premium for the cars they had available.

The average transaction price for a new car was $46,426 in December 2021, according to Edmunds, up $5,850 — or 14% — from a year prior.

That increase was primarily due to customers paying more than the listed sticker price — an average of $700 above what manufacturers’ were recommending. In December 2020, car buyers paid an average of $2,550 below the sticker price, close to the typical discount buyers traditionally pay.

Used car prices ended the year with an average price of nearly $30,000, up about $6,800 — or 29% — from a year earlier.

The spike in car prices was a major factor in the largest jump in overall inflation in 39 years. The 7% annual consumer price increase at the end of 2021 would have stood at 5.5% if car prices had remained unchanged.

Taking the pressure off prices

Buying a car is not only a major purchase for most Americans, it’s also a surprisingly frequent one. About 40% of US households buy a car every year.

But with the automakers expecting the supply of chips and other parts to improve this year, that should help with inventories, and take the pressure off prices, according to experts. That could lead to a return of consumers paying less than the sticker price, a big break for buyers, even if the price in the window doesn’t go down.

“From everything we are looking at, once production is back online in the later half of the year, we should see inventories start to build again,” said David Paris, senior manager of market insights at J.D. Power.

For example, J.D. Power forecasts that the average wholesale price of used cars should fall about 9% from the fourth quarter of last year to the fourth quarter of this year, and that prices should continue to decline in 2023. But that won’t get prices to where they were before the pandemic.

“Prices will be going down, but they’re not going to get to 2019 levels,” Paris said.

Pat Ryan, founder and CEO of CoPilot, a car buying app, said that used car prices are already showing signs of decline.

“There is no longer the same upward pressure on prices,” he said. But he also ruled out a return to 2019 levels.

“This market can get back to 10% above the pre-Covid pricing, but not all the way back,” he said.

Jonathan Smoke, chief economist at Cox Automotive, also believes there will be only a modest decline in used car prices relative to the spike in 2021.

“History tells us that a decline of more than 10% is rare indeed. Why? As prices fall, demand builds,” he said. “In 25 years, we have never seen a decline of as much as 13% within a year.”

As for the supply of new cars, “inventory levels should improve but remain historically tight,” Smoke said.

Customers shop at the Trader Joe's Upper East Side Bridgemarket grocery store in New York City, on Dec. 2, 2021.

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One reason the average purchase price for new cars could continue to climb is that the types of vehicles customers are looking to buy will continue to be more expensive.

Buyers want more safety options, such as automatic braking, cruise control that’s capable of slowing the car when the vehicle in front slows as well warnings when cars are in a driver’s blind spot. There is also the continued shift towards more expensive SUVs and trucks, and the expectations that new electric vehicle offerings will attract buyers to those models, which are typically more expensive.

All in, that means the average transaction price for new vehicles could continue to edge up, Smoke said, perhaps even faster than overall inflation.