• New car prices are rising as a result of higher production costs. In the U.S., the average price of a new vehicle was up 4.2% year-over-year in January 2023.

• This has fueled demand for used cars, with average prices tracking around 30% above pre-pandemic levels.

• Used car prices have likely peaked, but new car prices are expected to remain high. In 2023, prices are expected to decline by roughly 10% for used cars and by 2.5% to 5% for new cars.

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.

Why Are Car Prices Rising?

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.”

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%.

              
                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.

When Will Car Prices Drop?

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.”

Prices of used cars are starting to moderate

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.

How Is Inflation Impacting Car Sales Trends?

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.”