It seems like you hear about it more and more these days: The extreme lengths people are going to in order to buy a new house; how much it costs to fill up the gas tank; and what we’re spending at the grocery store.
And speaking of gasoline, it’s cars that have gone up in price, as well -- and we don’t just mean new ones. The used car market is seeing extremely high demand coupled with low inventory, making it a tough place to navigate.
We asked Michael Greiner, an assistant professor of management from Oakland University’s School of Business Administration, about what exactly is happening with vehicles right now, along with many other economy-related questions.
There isn’t one force to blame for what we’re seeing with inflation. Rather, it’s the perfect storm -- or perhaps, “imperfect storm” -- that has come with our circumstances as of late.
Take, for example:
In the midst of the COVID-19 pandemic, the government was doing a lot to help the economy survive.
“They spent about $5 trillion, much of it sent directly to the pockets of consumers across the country,” Greiner said. “In most recessions, poverty goes up and people’s savings go down, but in this most recent recession, poverty actually went down and people’s savings actually went up. It was very unusual. It was a policy decision that was made -- that we were going to risk inflation because of the fact that we wanted to make this economic crisis something that most people were going to be able to survive well.”
The problem was, as a result of this investment, the economy came roaring back, and it happened quickly. People had money to spend, and they wanted to buy things with that cash.
To rewind for a moment, an aside from Greiner: During the pandemic, people shifted what they were spending money on. The American economy is about 70% a service-based economy, meaning that most of the money spent in the United States goes toward things that people DO, as opposed to actual items.
“And what happened during the recession is, that changed,” Greiner said. “People weren’t able to go out to the gym. So instead of spending money on a gym, they bought a workout machine. They weren’t able to go out to restaurants, so instead, they bought, say, a new refrigerator. And so there was this huge shift that we saw in terms of what people were buying -- from services over to goods.”
And then there were fuel prices. Remember, people weren’t driving as much, especially in the early months of the pandemic, and consumers weren’t buying vehicles, either.
Do you recall that feeling, in the early COVID days, of going out and seeing roads that were seemingly abandoned? People weren’t traveling as much, even locally (or especially locally, in some cases).
“The result of that, was that demand for these things went down,” Greiner said. “And then the problem that manufacturers had, was that when they’re making vehicles, for example, when they’re drilling for oil, they can’t change the amount that they’re producing at a moment’s notice. It takes them a long time to change these things.”
But considering what was going on with the conditions surrounding the pandemic, eventually, manufacturers did reduce the number of cars they were producing.
And again, when the economy came roaring back, and with people having money to spend, suddenly there was an imbalance between how many vehicles the manufacturers were able to produce, and how many people were demanding.
That drove up prices.
“Airlines reduced the amount of capacity they were offering, car leasing companies reduced the amount of vehicles they had available for people to rent, and as a result of all that, suddenly, when the economy comes back, there’s this huge demand for vehicles, and there are less vehicles available,” Greiner said.
Supply chain issues
Things have changed a lot, especially over the past 40 years or so, when it comes to how our economy operates.
And when we’re talking about vehicles, “The average vehicle actually crosses the border between the United States, Canada and Mexico multiple times, as it’s going through the process of being built,” Greiner said. “So what happens is, as a result of different parts of the world being shut down at different times [considering the pandemic], and then again, this imbalance of supply and demand, suddenly you had the supply chain get jammed up at places.”
A classic example of this involves semiconductors.
Those are the chips found in computers, and really, all sorts of items these days.
“Cars, for all intents and purposes, are just computers with wheels now,” Greiner said. “So, the shortage of semiconductor chips then, made it so that it was a real challenge for the auto manufacturers to then ramp up their production, because they didn’t have enough chips to do what they needed to.”
Now you can see all these factors coming together.
“But then what you have going on, is the confluence of all the worst things you could have happen -- going on at the worst possible time. Because in addition to this issue with the pandemic and this imbalance between supply and demand, and people having money to spend but nothing to spend it on, supply chains being messed up … in addition to all that, now you’ve got the war,” Greiner said.
A lot of what’s going on overseas, between Russia and Ukraine, is impacting fuel and food.
This doesn’t directly tie into the vehicle problem we’ve been detailing, but it’s still important to take a look at how the war impacts inflation.
Russia is a pretty significant supplier of oil and gas, especially to Europe. And Ukraine and Russia together produce about 40% of the world’s wheat, Greiner estimated.
“Now, those two things don’t directly affect us as Americans very much, because the United States is also a very significant supplier of those two things,” he added.
The United States is what’s called a net energy exporter: meaning we produce more than we consume, which is a big change from where the country stood even 20 or so years ago.
“Similarly, we’re also an agricultural powerhouse here,” Greiner said. “And especially when you combine us with our neighbors, and close allies, Canada and Mexico, we are very significant suppliers of wheat and energy. So those aren’t big concerns to us in terms of how it’s going to affect us, like our direct supply. Very little of the oil that we receive here in the United States comes from Russia, which is part of the reason why it was very easy, for example, for President Biden to say that we were going to stop accepting oil and gas from Russia.”
But these things are important in terms of the global market.
“And as a result of that, you’re seeing prices go up for those things as well now, because of the fact that you’ve got, again, less supply, as a result of less coming out of Russia and Ukraine, while at the same time with oil, in particular, you’ve got OPEC that puts a cap on how much they supply, to keep prices high,” Greiner said.
Demand for oil has been going up ever since those early days of the pandemic.
“You have high demand, supply that’s constrained, and that then drives the prices up,” Greiner said. “So that’s kind of what we’re dealing with here.”
My own story
As someone who totaled her car last month, I had to go vehicle shopping on pretty short notice. I wasn’t expecting the market to be so wild. I also learned that tax-return season is one of the most popular times of year for car-buying, according to at least several of the sales associates who I was browsing with.
I then went on to hear crazy stories of dealerships trying to buy my friends out of their leases or cut deals for trade-ins, just to restock those lots with more used cars.
A Kia Telluride buy-trade-sell Facebook group I’m still a member of, just for fun, regularly lists the SUVs for well over MSRP, even with plenty of miles on them. It seems people need cars -- dealers and shoppers alike, and they’ll go to quite the lengths to get them.
I didn’t even bother negotiating much of a deal on the SUV I eventually chose. I saw that it was within my price range and moved forward with the sale. I knew I had to act quickly, as I had stalled on a decision the week before, and lost out on a car I’d really liked.
Greiner didn’t seem surprised to hear of my account.
“One of the first indicators that there was an issue with inflation was vehicle prices,” he said. “And that’s an interesting thing, because the way you calculate inflation is kind of an average of the different things that people are buying. And as it turns out, that average gets driven up when you have one thing that is very expensive. One of the things that was very expensive, right from the beginning, was cars.”
And it made sense that the used car market got oversaturated.
“Again, there was a constraint on how much these auto manufacturers were able to supply, so on top of that, you had that spillover into the used car markets,” Greiner said. “Based on the fact that new cars weren’t available, people were buying used cars, so that increased demands there. People were able to charge more.”
Within the new car industry right now, auto manufacturers are trying to stop dealerships from charging above the list price for vehicles. Remember, dealerships are separate businesses. They’re not owned by the auto manufacturers. And in some cases, the auto manufacturers are making these cars, sending them out to the dealerships, and the dealerships are seeing an opportunity to charge well over the list price, because there’s such high demand for them right now.
What can be done
Is there anything people can do? Are we powerless to some of these prices and conditions?
“The whole United States is powerless in some respects,” Greiner said. “Oil prices are driven by a global economy. It’s impacted by what’s going on in Ukraine, Russia and Middle East – just as much as it’s impacted by what’s going on here.”
“Solutionaries” is a solutions journalism-based show that’s tackling the topic of inflation. To learn more, check out SolutionariesNetwork.com.