With the cost of living increasing across the board, inflation is at the forefront of many Australian minds. We often get asked about the relationship between inflation and car prices, or how does inflation affect car prices, with many customers concerned about prices continuing to rise. If you’ve been hearing the word inflation thrown around recently but are not quite sure what it means, then the below blog is for you! We have tried to keep it simple when it comes to explaining inflation, and how it can impact the prices of cars.
Understanding inflation – how it’s all connected
Inflation is a measure of the increase in price for goods and services. Inflation and car prices increasing are related, but the vehicle industry is not alone in experiencing a rise. Maybe you’ve noticed your grocery bill seems to be averaging higher than it did a year ago, or your utility bills have increased more than you expected this past quarter. This is due to inflation. Put simply, inflation means you can buy less with the same amount of money that you once could. As prices increase, our purchasing power as consumers decreases alongside the value of our currency. As a result of prices increasing, consumers will often demand wage increases from their employers to compensate for the increase in cost of living. In turn, business’ will increase their prices of goods and services offered to pay increased wages.
Inflation in Australia
Australia has seen a sharp rise in inflation over the past few years, with many industries still suffering from supply-chain disruptions linked to the COVID-19 pandemic. Interruptions in supply chains can cause delays in, or even stop completely, production of certain goods and services, which in turn increases demand and pushes prices up further. During the pandemic, the Australian government provided various stimulus packages which increased the amount of cash households had available to spend. More cash available means more demand for goods and services, pushing prices up further. In addition to the ongoing COVID-19 interruptions, events like the ongoing conflict in Ukraine have impacted the Australian economy through increases in prices and availability of traded commodities (such as petrol). It is expected that inflation is going to decline to a more stable level over the remainder of this year and in to 2024.
Inflation and car prices
So, “how does inflation affect car prices?” I hear you saying. The answer is not simple, but we’re going to do our best to break down the relationship between inflation and car prices, and to explain the main factors that impact the cost of vehicles.
- Interest rates: an increase in inflation generally coincides with the RBA increasing the cash rate. In turn, this will lead to an increase in interest rates and increase the cost of borrowing. If you are seeking finance to purchase a vehicle, a higher interest rate means more interest will be paid over the life of a loan.
- Increased costs in the supply chain: it’s important to remember that a car does not materialise out of thin air, ready for sale. There will be an extensive chain of production with expenses at every stage. Over time, inflation will increase the prices on parts, raw materials, transportation, and wages for workers. Increases in expenses throughout production and sale of cars, means an increase in the final sale price.
- Disruptions in the supply chain: as mentioned above, global events such as the COVID-19 pandemic or the conflict in Ukraine have had a direct impact on local goods and services. Since the Russian-Ukraine conflict commenced an increase of 30% in fuel prices has been observed in some cases.
- Cost of running a vehicle: Outside of petrol, there are other costs you need to consider when purchasing a vehicle like insurance, maintenance, and repairs. Inflation will see an increase in the prices for all these products due to increases in cost of repairs, materials and rising labour costs.
Tips to consider when purchasing a vehicle in the current economy:
- If taking out finance, strongly consider whether a fixed-rate loan or a variable loan is better for your circumstances. Locking in a fixed-rate now will protect you from potential further interest rate increases. On the other hand, if the interest rates were to decrease a variable loan product may save you money in the long-term.
- Shop around when it comes to insurance and other products to ensure you are getting the best deal. Increased prices also increases competition amongst providers, with consumers demanding more value.
- Worried about petrol prices continuing to increase? Consider purchasing an electric vehicle to reduce your ongoing fuel expenses. For some inspiration check out our Best Electric Cars
Still wondering how does inflation affect car prices? The team at Fido Finance are here to find you your best vehicle finance rate and repayment, structured to your requirements and lifestyle! Give us a call on 13 FIDO today to see how we can help you get behind the wheel of your new car.