If you think about inflation, you think how is inflation measured? There is a mythical average consumer who needs housing, food, vehicle costs, and often it is not very hard to see the average mythical person because it is someone on the street where you live. We all need food, we all need someone to live and move around, but all of us are now buying a new car every year, however vehicles do not last forever. If you own a vehicle and it begins to cost more to repair than to buy a newer version, you know it is time to upgrade.

In an article by Lydia Depillis and Jeanna Smialek of the New York Times News Service, they examined why car prices have remain high both new and used. During the pandemic, it was easy to see because a global shipping problem happened, at the big 3 – the cars are put together but the parts are shipped in from a variety of sources. The new vehicles have more semi-conductors in them and there was a shortage as well as given the age of the average vehicle there was strong demand to upgrade. Those supply and demand lines you learned in economics helped explain higher prices.

The pandemic is over, global shipping is approaching normal, domestic automakers are producing more vehicles, particularly the popular ones, prices should fall, correct?

Inflation is not going to be a smooth path downward: there are going to be bumps along the road, noted Blerina Uruci, chief economist at T Rowe Price. There are many idiosyncratic factors at play right now.

In terms of the auto industry. it is useful to examine how did they make their money?

Automakers produced more cars than the marketplace demanded, offering incentives to clear inventory and compete with low cost imports. Dealers made their profits on volume and financing. After the pandemic, semi-conductors were allocated to trucks and SUVs which offered lower volume of sales but higher profits per sale. About 5 million cars that normally would be produced never were. Dealers increased their margins and vehicles became more expensive.

Typically there would have been a generation of cars that would have come off their 3-year lease and put either bought out the lease or traded in for a new model. The number is less than normal, which means at auctions, prices are higher than normal for used car dealers.

Higher interest rates mean car payments have increased according to TransUnion, the average monthly payment rose to $736 from $585 two years ago. Used cars are averaging $523 up from $413 two years ago.

At the high end of prices, demand remains strong. At the low end, because fewer vehicles were made, demand remains strong. The only good news for car buyers is according to Kelley Blue Book data shows that average prices has fallen below list for 2 months.

Linking to dividend paying stocks, in economics 101 you learn about supply and demand. It still means a great deal to most industries. While there are alternatives for everything, supply and demand does provide reasonable explanations for what is happening. The issue for you as an investor is what are the alternatives? will they affect the profitability of the company?

There are more questions than answers, till the next time – to raising questions.