Why Are New Vehicle Prices Increasing?

If you’ve been searching for a new vehicle lately, you’ve probably noticed that prices aren’t exactly what they used to be. In fact, new vehicle prices are setting record highs. According to Kelley Blue Book, the new-vehicle average transaction price (ATP) in the United States is estimated to be $48,094, which is a 6.1% jump from last year in September 2021. So, what is the cause for such a dramatic increase? Part of it can be chalked up to simple inflation, but that doesn’t tell the whole story. In this article, we’ll deep dive into some of the other prominent factors behind the price spike

Increased Technology

It wasn’t too long ago when features such as infotainment systems, rear-view cameras, and satellite radios were reserved for luxury vehicles. Today, these items are far more commonplace. From advanced-safety technology to new and more efficient powertrains, manufacturers are tinkering today’s vehicles to be full of cool gadgets. However, high-tech always comes at a cost and some of those costs are then passed down to the consumer in the form of higher vehicle prices.

Government Mandates

Many people are surprised to learn of the impact that government mandates have on vehicle prices. One major way that the government impacts vehicle costs is through fuel-efficiency regulations (specifically Corporate Average Fuel Economy or CAFE Standards). Manufacturers are required to meet certain fuel economy standards which results in more money spent on research and engineering. Much like the technological advances, the costs associated with increased fuel economy regulations results in manufacturer’s raising the prices of vehicles.

Another governmental impact on vehicles prices is attributed to the mandated addition of safety equipment. As more safety technology becomes required, vehicle prices will continue to climb.

Cost of Materials

Like nearly every other industry, auto manufacturing is subject to economic forces beyond its control. A prime example of this is the rising cost of raw materials and commodities used to manufacture automobiles. According to a recent J.P Morgan article, raw material costs continued to soar past the year 2020 due to global supply chain issues stemming from the pandemic as well as other forces. “The weighted average cost of raw materials used to produce a new vehicle hit an all-time high in 2021, rising 116% year-over-year, J.P. Morgan Research data shows.” As the cost for these materials keep increasing, so will the prices be passed down to the consumer.