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Inflation and Supply Chain Impact on Dealership Markups

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A recent study by Edmunds (a vehicle-shopping research organization) found that 82% of car purchasers spent more than the manufacturer’s suggested retail price (MSRP) in January, compared to only 3% who did so a year earlier and less than 1% in January of 2020.

The lack of components and computer chips caused by the initial covid 19 pandemic is the most often cited reason for increased automobile costs. However, contrary to popular belief, manufacturers have made only minor adjustments to the prices of the vehicles they send to dealerships. So it is the dealerships that have gotten away with charging exorbitant markups on automobiles by taking advantage of lower supply and soaring demand to their benefit.

How The System Works

The Dealership buys or rents the car from the manufacturer until it sells. Before the internet, this made sense since the car sale process was more like buying a home, and there are local tax and state registrations to manage. However, this seems to be changing, and not every manufacturer sells automobiles via the Dealership. Some manufacturers, like Tesla, sell directly to the public, while others, such as rental vehicle firms and police agencies, sell automobiles in quantity to various customers. Dealer networks sell most cars, and this number has declined due to pandemic-related shutdowns and supply-chain bottlenecks.

What’s Really Going On?

It’s estimated that the overall number of automobiles sold during the Covid-19 pandemic was 15% lower than the average volume during the four years before the pandemic. Some automobile manufacturers have written to their dealership networks requesting that they refrain from engaging in price-gouging practices.

When one delves further into the market condition, it becomes clear that there is more happening than “shortages equal higher pricing.” The U.S. economy is changing in ways we have never seen before. Numerous products and services are seeing rapid price increases. Anyone who has purchased groceries in the last year or even attempted to fill their gas tank in recent months can attest to this. Fuel prices have increased by more than 40% in several regions of America during the last year.

If this is the kind of “inflation” the Federal Reserve is attempting to combat, the odds of success are overwhelmingly against them. Higher interest rates will make it more difficult for those who need to borrow money to purchase a vehicle. Still, they will have little effect on car pricing as long as production remains low. Towards the end of this article, J.D. Power says the increase in production and inventories of new cars will eventually cool off the used car market and bring the prices back down to more “normal” levels. We could assume that this may also cool down the new car market.

Whether you call it inflation or anything else, the reality is that the cost of many products is fast increasing nowadays.

Should You Wait?

Let’s go back to economics 101 and refer to the supply and demand lecture. I think it would be safe to say that new car prices will decrease as inventory and production increase. Of course, there are no assurances, but I believe the used car prices will drop faster than the new cars at first. There will probably be a delay with competing new car dealerships in lowering their prices, but it will balance out eventually.

Waiting for six months if you still have a usable car seems to be a wise option in this situation. Then, suppose you can fix or maintain your vehicle to go through the following winter. In that case, the spring market for both new and used automobiles may be more favorable. But, of course, this supposes that COVID does not force us out of our manufacturing employment in the future.


Time will tell, but I suspect that once the flow of new cars from the manufacturers hits the dealerships, the price of the new cars will drop steadily. As the new vehicles enter the market, the used car prices should decrease since inventory will continue to build. So should you buy a new or used car right now? Probably not if you have one in good working condition and will last another year or so.

As someone who has followed vehicle pricing for more than a decade, I am aware that there is not only one reason for the current increase in vehicle price markups. Instead, several factors contribute to this uncommon market disruption, all of which are COVID-related in one way or another, resulting in this unusual market disruption. Although COVID is not yet ended, most of America has returned to work. In many instances, we are all working harder than we have ever done before.

Let’s keep our fingers crossed and see if the current trend takes a turnaround and gets the prices back to normal.

If you would like to learn more about which used car to buy, check out this article on used Honda Civics.

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