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How do soaring car prices affect the economy?

The consumer price index was higher in the last 13 years in May this year and prices were up five percent from a year earlier. And whats more, around one-third of the price increase was attributed to the cost of used cars.

Used car prices rose thirty percent in the last year till May, just shy of a record one-year increase in used cars price back in 1975.

According to Edmunds, an auto information resource, the average price of used cars in June reached around 26.5 thousand dollars, up 27% from the previous year, while the average price of a new car transaction was up only by 5 percent.

This was a record higher price for both used and new cars. It is an economic problem that weighs heavily on family budgets. About two-fifths of American households buy some type of car each year, and this demand shot up due to delayed purchases.

The
has been for a variety of reasons, but they all come down to two factors: high demand and limited supply.
When the hard-hit car rental companies sold one-third of their fleet to raise enough cash to navigate the uncertainty of the pandemic, the aftermath was an increase in the price of used cars.

There was a period where the price of used cars was low due to high supply. This is also why the price increase is so high in percentage.
But with the recovery in travel, car rental companies were suddenly faced with a shortage of rental cars and stopped selling off their cars. Economic recovery post-pandemic means that people found work and those who worked from home returned to the office. This created an increased demand for cars.

Also, many buyers were buying cars which they intended to do the previous year but were delayed due to uncertainty about the global virus spread.

New car prices have also risen due to severe shortages of computer chips. Dealer inventory has historically been at an all-time low. Another reason for the lack of new car inventory is that car rental companies cannot afford the cars of their choice and are stuck with their existing fleet.

Another factor that drives up the average price of a car is buyers' desire for more expensive trucks and SUVs rather than lower-priced sedans. Consumers also want more expensive features like automatic braking and lane-departure warnings, which also drive up prices.

Jonathan Smoke, the chief economist at Cox Automotive, said that prices for new and used cars generally account for about seven percent of the Consumer Price Index, but generally do not affect much since there is never a sharp disruption in prices.

According to Smoke, traditionally, the used car prices rose at the rate of one percent year on year. However, with an unprecedented rise in used car prices, it has contributed a lot to inflation.

Rising new and used car prices are an important part of the inflation, given how much Americans spend on cars each year, which is more than 600 billion dollars each year.

Economists believe this is a temporary increase and that the price of used cars will start to decline later this year. Thus, there is no need for the Federal Reserve to take drastic measures to deal with higher inflation.
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