The simple reason prices remain high is because demand remains strong and people keep shelling out the dough, but it’s a little more complicated then that.

If you’re wondering why used and new car prices remain high (in some cases getting worse,) federal reserve and economy reporter Jeanna Smialek might be able to shed some light on that.

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Smialek’s reporting was recently featured on the New York Times “The Daily” podcast where, in conjunction with Micheal Barbaro, they unpacked why, despite anti-inflationary measures in full effect, car prices are more expensive then they’ve ever been.

You can find/listen to Smialek’s analysis on the Daily by clicking here.

According to Smilalek, for used cars, the good news is the trickle down effect of the fed’s raised interest rates is already affecting the wholesale market for used inventory.

“When the used car dealer that you go to purchase a (used) car from is buying its inventory, those prices aren’t as high as they were previously.

The consumer prices for used cars, however, are holding the line.

“The used car dealers, they’re paying a lot less at auction, but they’re charging on average $28,000, which is sort of the height of the car shortages. It hasn’t gone up more, but it hasn’t started to meaningfully gone down yet.”

It’s a story, as Barbaro summarizes her point, that’s played out in other consumer markets, too, most notably in gas prices and other consumer goods.

Gas companies and the makers of your favorite foods and goods are reluctant to lower prices anytime soon as they’ve enjoyed record-breaking profits these past two years thanks to millions of Americans sitting at home receiving pandemic relief checks.

As long as Americans continue to pay these high prices, used cars included, why lower them anytime soon?

For the new car market Smialek givers two major reasons prices remain high.

The first is the supply chain has not caught up with the level of production car manufacturers wish they could crank out cars.

“Even though supply chain has begun to heal, it’s still really hard to build new cars these days.”

The second and major reason new car prices are still high is because richer customers are able, and continue to pay, for higher and higher prices without much impact to their overall budget.

“People in the upper-middle income spectrum have amassed a lot of savings over the last couple of years and have been spending them down only slowly. They’re sitting on big cash piles, if they want to buy a fancy new car, they’re capable of doing that. They’re less interest rate and finance rate sensitive. They’re buying in cash.”

As Barbaro insightfully points out, this new trend in the new car market is hurting those in the lower income spectrum the most.

If inflation and interest rates continue to get worse before it gets better, not only can lower earners not afford a new or used car, a contraction in the labor market might mean them losing their jobs, too.

Both Smialek and Barbaro conclude that all the fed can do in this situation is continue to raise interest rates to where it does affect demand enough that used and new car sellers have no choice but to lower their prices.

That, of course, is a managerial choice where the companies and car sellers have to come to the conclusion that, if they continue to raise prices, it’ll eventually backfire, eating into their profits instead.

“They will only do that (lower prices) if they believe consumer demand is durably slowing.”

For consumers, it looks like we’ll continue to see high used and new cars prices for, at least, several months, well into 2023.

Whether prices will actually cool is, as Smialek wraps up, “a question for the next 60-90 days.”

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