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What’s been driving the rise in auto prices since COVID?

Semiconductors are just a semi-cause

The FRED graph above plots the consumer price index for motor vehicles: Clearly, the prices of both new and used cars have risen over the course of the pandemic. What’s been driving this rise in prices?

On the one hand, the generous fiscal stimulus to mitigate the impact of the pandemic likely increased demand and put upward pressure on car prices. On the other hand, as the graph also shows, total domestic auto production has been and remains substantially below January 2020 levels, which suggests that supply-side factors have also likely played a role in the rise of car prices. With the demand for cars outpacing production during this period, car inventories were gradually depleted from early 2020 to the present, as also shown in the graph.

The outbreak of COVID-19 and its impact on workplace operations may account for the drop in production over the first few months of the pandemic, but it’s unlikely that these factors account for the persistent decline of domestic car production.

A popular narrative attributes this decline to semiconductor shortages. Semiconductor production indeed experienced significant pressure over the past couple of years, with demand spiking and manufacturers unable to scale up production fast enough to meet that demand. Because semiconductors have become a critical input for the production of cars, an input with few close substitutes, shortages of semiconductors can severely curb the production of new cars.

So, semiconductor shortages are likely playing a significant role. But the FRED graph below shows that the recent decline of car production falls broadly within the long-term downward trend over recent decades: Car production has generally been declining since the mid 1990s. This trend suggests that, even without the significant increase in demand following COVID-19, car production may still have continued to decline; moreover, car production may not revert to pre-pandemic levels even after the semiconductor shortages end and demand eases up.

How these graphs were created: Search FRED for “Consumer Price Index for All Urban Consumers: New and Used Motor Vehicles in U.S. City Average.” From the graph, click on “Edit Graph,” open the “Add Line” tab, and search for and select “Domestic Auto Production” and “Domestic Auto Inventories” Use the “Edit Lines” tab to change units to “Index (Scale value to 100 for chosen date).” Enter the base year date as “2020-01-01.” Select the “Copy to All” button to apply to all series. Set the earliest date in the window to “2020-01-01.” For the second graph, search FRED for “Domestic Auto Production.”

Suggested by Jason Dunn and Fernando Leibovici.

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