US Car Dealers as Main Culprits of Inflation... Price Hikes Driven by Excessive Margins

A study has found that car dealers are the main culprit behind persistent inflation in the US, despite the country's aggressive tightening measures last year. As consumer sentiment, suppressed during the COVID-19 pandemic, turned into revenge spending with the arrival of the endemic phase, dealers took excessive profits, making it appear as though prices were continuously soaring.

On the 23rd (local time), the Wall Street Journal (WSJ) reported that according to an April study published in the US Bureau of Labor Statistics journal, the margin rate that US dealers earned from new car sales was 11.5% last year, more than 2.3 times higher than the 4.9% in 2019.

[Image source=AP Yonhap News]

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Household savings increased significantly as consumption decreased after COVID-19, but with the arrival of the endemic phase, demand for vehicle purchases surged. However, the supply of new cars did not increase in proportion to the rising demand, and the US auto market is now expected to face severe supply shortages starting in June. Automotive research firm Wards Intelligence predicted that US dealerships would hold about 1.5 million new cars in inventory in parking lots or showrooms in June, a 42% decrease compared to the same period in 2020.

As the market atmosphere changed, dealers raised margins substantially, fueling vehicle price increases. WSJ explained that US dealerships add an average premium of $35,000 to $40,000 over the suggested retail price when selling luxury vehicles priced above $80,000 (approximately 106.39 million KRW). According to statistics from the US automotive information website Edmunds.com, 82% of recent car buyers paid dealers a premium.

The dealers' margin spree contributed to rising consumer prices in the US. The US Bureau of Labor Statistics analyzed that from the end of 2019 to the end of 2022, the US Consumer Price Index rose by 16%, with the impact of new car price increases accounting for about 1 percentage point, and the portion driven by dealers ranging from 0.3 to 0.7 percentage points.

WSJ stated, "The dealers' spree originated from the (inventory) shortage," adding, "After a surge in car demand post-COVID-19, supply decreased due to supply chain issues, and a significant portion of the increased new car prices went into the pockets of dealers."

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