COVID-19 messed up pretty much everything, and the auto industry was no exception. There have been chip shortages, manufacturing snafus and now, with the near certain raising of interest rates by the Federal Reserve, a perfect storm is gathering to make already expensive cars more unaffordable.
The Federal Reserve cut interest rates to zero two years ago when the economy was in a pandemic lockdown-induced free fall. But with the strengthening economy and rising inflation, the Reserve indicated this week that it would likely raise rates a quarter of a percent. Higher interest rates is the main tool the feds can use to tamp down on rising inflation.
How will this affect the auto industry, which is already facing supply chain difficulties? Who knows, an expert from J.D. Powers told NBC News:
Hiking rates would likely affect several U.S. sectors along with the automotive industry, with some analysts contending the increase will trigger more uncertainty in the auto world.
Tyson Jominy, vice president of data and analytics at the consumer intelligence company J.D. Power, said usually there is an automotive roadmap for when interest rates spike and decrease, but little precedent exists for a global pandemic and an auto supply-chain shortage.
“We don’t have a lot of experience with increasing rates with nothing to sell,” Jominy said.
The global chip shortage seems to be coming under control, but there are still widespread worries about other supply chain disruptions affecting rubber, plastics and steel, which has made it difficult to manufacture vehicles, NBC News reported. Wall Street has underscored concerns about rising interest rates and inflation.
J.D. Power estimates spiking interest rates would lead to a $15 billion loss in used vehicle sales and another $7 billion in losses on new vehicles.
With this rate hike, the industry could sell 150,000 fewer new cars and 500,000 fewer used cars this year, experts told NBC. Car shoppers are certainly feeling inflation pain. The average cost of a new car skyrocketed by $6,000 in 2021 to $47,077. The average used car cost $30,790. Low interest rates on car loans were the one enticement to shoppers still open to dealers, as auto makers slashed incentives due to the hot market. With not enough cars being built to meet demand, and supply chain issues continuing to affect manufacturing volume, what the auto market will look like after the rate hike is anyone’s guess.