Auto demand could face a ‘real problem’ amid rising fares and sky-high gas prices [Video]

Friday, new inflation data released that it is becoming ever more expensive for Americans to buy cars, with prices for new and used vehicles increasing by 12.6% and 16.1% respectively over the past year.

But it’s not just inflationary pressures that are weighing on consumers, it’s also the effect of rising interest rates. The Federal Reserve is hosting a policy-making meeting next week, where it is should raise its policy rate by at least 50 basis points.

Bank of America senior auto analyst John Murphy predicts higher rates could hurt consumers and the auto industry in a number of areas, including making it more expensive to borrow money to buy a car .

“I think when you look at every 100 basis point increase in auto loan rates, it’s about $15 to $20 [added] based on around $600 in monthly payments,” Murphy told Yahoo Finance on Thursday, the day before the latest inflation data was released. “So what we’ve seen is roughly that so far in an average rate of 48 months.”

Let’s also not forget that the rate hike environment coincides with rising fuel prices, with AAA noting the average cost of a gallon of gasoline on Friday. is dangerously close to $5 a gallon — a psychologically significant number that would be a record, without taking inflation into account.

“These rising fares and rising gas prices are a real problem for automotive demand,” Murphy said.

There’s good news for consumers, says Murphy. Cars depreciate at a slower rate over time, which means auto owners will get more returns when they sell their used cars than before.

The debate between electric vehicles and gasoline engines

Another area could also offset the cost pressures facing consumers – the prospect of new affordable cars, especially hybrid and electric vehicles (EVs), which are gaining popularity.

General Motors (GM) announcement the 2023 Chevrolet Bolt EV will be much cheaper than last year’s model. But that might be more the exception than the rule, and Murphy is skeptical that EVs as a whole will continue to get cheaper.

Chevrolet Bolt EV

“When you look at the increase in nickel, cobalt, and lithium prices, the cost of these electric vehicles has gone up much more dramatically than even internal combustion engine vehicles,” Murphy says. “Unless the industry wants to eat an extra $1,000 cost on an electric vehicle versus a [internal combustion vehicle]they’re not going to push EVs as aggressively in the near term. »

The high cost of electric vehicles helps explain why many consumers would rather buy gasoline-powered cars than electric vehicles despite skyrocketing gas prices. So what should a consumer do in this difficult environment?

“If you’re lucky enough to own a used vehicle that’s inflated in price, instead of buying another used vehicle,” Murphy said, “you’re probably better off buying a new vehicle right now. .”

Pras Subramanian is a reporter for Yahoo Finance. You can follow him on Twitter and on instagram.

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