Why Are New Vehicle Prices Increasing?

If you’ve been in the market for a new vehicle lately, you’ve undoubtedly noticed that the price of a new vehicle isn’t what it used to be. In fact, new vehicle prices are setting record highs. Yahoo Finance reported that the estimated average transaction price for light vehicles in the United States was $37,577 at the end of 2018. That’s a nearly 25% increase over the $28,350 cverage vehicle cost in 2008. So why such a dramatic increase? Part of it can be accounted for by simple inflation, but that doesn’t tell the whole story. In this article, we’ll take a look at some of the other factors behind the price spike.

Increased Technology

It wasn’t that long ago where features such as infotainment systems, rear-view cameras, and satellite radios were reserved for luxury vehicles. Today, these items are commonplace. From advanced-safety technology to new, more efficient powertrains, manufacturers are loading today’s vehicles full of cool gadgets. Additionally, many of these options are even being included as standard equipment.

However, all of that technology comes at a cost. Manufacturers spend millions of dollars each year on research and development. Unfortunately, some of that ends up getting passed on to the consumer in the form of higher vehicle prices.

Government Mandates

Many people may be surprised to learn of the impact that government mandates can have on vehicle prices. One of the main ways that the government affects vehicle costs are through fuel-efficiency regulations (specifically Corporate Average Fuel Economy or CAFE Standards). Requiring manufacturers to meet certain fuel economy standards results in more money spent on research and engineering. Much like the technological advances, the costs associated with increased fuel economy regulations is made up in part by manufacturers raising the prices of vehicles to help recover their costs.

Another way in which the government can impact vehicle prices is through the mandated addition of safety equipment. There was a time when basic safety features such as seatbelts weren’t required in vehicles. Eventually, they became required by law as well as other safety items such as a high-mounted brake lights, dual front air bags, electronic stability control, tire pressure monitoring systems, and more recently, rearview cameras. As more safety technology becomes required inclusions, vehicle prices will continue to climb.

Cost of Materials

Like nearly every other industry, auto manufacturing is subject to economic forces beyond its control.  This comes in to play when discussing the cost of raw materials and commodities used to manufacture automobiles. According to Automotive News, “Raw materials in a typical North American-built vehicle cost $2,000 in August 2018, up about $221 from a year earlier.” As the cost for materials such as aluminum panels, carbon fiber, magnesium, steel, plastics, copper, etc. increase, those costs are then passed down to the consumer.

Even More Increases to Come?

While the current geo-political climate is quite convoluted, one thing that could potentially have a significant impact on vehicle prices is the implementation of new tariffs. While you’ll get varying opinions from experts on the magnitude of the impact that tariffs may have, according to the USA Today, tariffs on imported vehicles could possibly increase prices by as much as $4000 – $5000. While manufacturers may elect to subsidize a portion of that amount, consumers would likely be left to make up the remainder. Though nothing is for certain at this point, it is certainly worth keeping an eye on in the upcoming years.