Buy a New or Used Car When Inflation is High?

You may be wondering, is it better to buy a new (possibly electric vehicle) or used car when inflation is high? Could your car become a hedge and protect you from inflation?

Cars are depreciating and usually are not a good investment when low and stable inflation rates. However, it would appear that, at least in the medium term, electric vehicles for higher-value and electric car brands could be a good investment when inflation is high.

This article will explain the impact of inflation on car prices and why the decision to buy when inflation is high, might differ from the recent low inflation period.

What is inflation exactly, and why does it matter?

It should now be no surprise to anyone that inflation is now everywhere. It has always been that way, yet people have seemingly never noticed. Even TV commercials feature the much-dreaded word, inflation! It has become a political issue.

As long as the current energy policy remains, we see little hope that inflation will come down soon. The “grease” that keeps the economic engine going is much needed, at least that’s how economists think, to entice people to invest, save and spend.

Inflation is a major concern for many people, especially those trying to save money. Inflation acts as a tax and is the gradual increase in the prices of goods and services that, over time, your money will buy less and less. 

The simple fact is that inflation is the number one enemy of savers. It is the number one wealth destroyer and often why people cannot get ahead financially. Inflation is a tax on your savings, a tax on your income, and a tax on your purchasing power.

Think of inflation as a hidden tax

Inflation is a hidden tax that is not deducted from your paycheck but acts as an invisible difficult-to-avoid tax. 

Further, inflation is a regressive tax. It typically hits the poor as well as the middle class the hardest. Wealthier people can protect their savings from inflation by investing in assets that increase in value when inflation rises.

Inflation can be cruel. It is taking away your purchasing power gradually over time. In simple ways, the usual 2% inflation would leave roughly a 20% hole in your real savings power after ten years. The current approximately 8% does the same damage in 36 months.

What can you possibly do to protect yourself from inflation?

The best defense against inflation is to invest in assets that increase in value when inflation rises. These assets include real estate, gold, and commodities. Another good way to protect yourself from inflation is to have a diversified portfolio that includes investments in various asset classes.

We have a great article here on how to protect yourself from inflation.

Are cars a good investment when inflation is high?

The best defense against inflation is to invest in assets that increase in value when inflation increases, so-called “real” assets. The supply chain issues caused used car prices to soar in manufacturing new cars, especially electric vehicles.

Is an investment in cars good inflation protection? Like any investment, cars are not a guaranteed way to protect against inflation. While cars are physical assets that can hold their value over time, they can also depreciate.

When traveling in Argentina a few years ago, I noticed how the local population was forming queues outside banks to exchange an ever-depreciating domestic currency for US Dollars immediately. A local kindly explained that the lower to middle-class population buys goods or non-perishable items directly to maintain their purchasing power.

Those with higher disposable incomes also invest in used cars to avoid inflation. We are talking of inflation rates above 30% for Argentina compared to ours but could investing in cars still be a good idea?

Is inflation affecting new car prices?

The short answer is yes! Inflation has become a huge problem for the global car industry. 

Think about what goes into a car, raw materials, technology, computer chips, and labor. All those elements are short in supply and therefore subject to rising costs. The oil price has risen sharply over the past year, putting upward pressure on the cost of raw materials. 

The price of much-needed copper, for example, has risen by around 20% since 2017. The price of aluminum has also risen sharply, which has a knock-on effect on the cost of batteries. The global wholesale price of lithium carbonate, a key ingredient in batteries, has increased by around 50% since early 2016.

Inflationary pressures have been exacerbated by a skills shortage in the car industry, particularly in the US, where the unemployment rate is at a 17-year low.

Demand for new cars is still high, and manufacturers cannot meet this demand with current production levels. Meanwhile, inflation is still a concern, pushing prices for all goods, including cars.

Are cars a good investment during inflation?

As always, the answer to this question is more nuanced. It matters a lot regarding what car manufacturer and price range you are looking at. For example, I have recently been looking at changing to an electric vehicle. I still have a dirty diesel car and think it is probably time for a change within the next 12-18 months.

To test my thesis, I compared prices and waiting times for mass-produced vehicles such as Toyota, Hyundai, and Kia. With waiting times between 4-12 weeks, it doesn’t surprise that new car prices to used car prices reflect the norm, in that used cars typically come at a 10-20% discount, depending on their age.

This calculation was flipped on its head when I wore nicer clothes and went to see the local BMW, Audi, and Porsche garages. Currently, all their new cars have a waiting time of at least 12-18 months, and used cars, astonishingly, are in the region of 7-15% more expensive than a brand-new model straight out of the factory.

This made me think.

Given that I want a new, ideally electric car, and in the time horizon for these waiting lists, why don’t I put down the deposit and fix the price of a brand-new car estimated to be delivered earliest in 12 months? 

I use the Porsche Taycan (electric, entry model 85k USD) as an example. I can fix the price now for a 10% typical deposit. In a year, I can either be the happy driver of a brand-new Porsche (I wouldn’t personally, as I have no affection for nice, expensive cars), or if inflation persists due to ongoing supply chain issues, I can immediately sell it for a 10-15% mark up in the used car market.

This is, at least in theory, how inflation protection works. Yes, of course, the risk is that inflation will ease and that new car and used car prices will revert to their normal behavior. Will new car prices be lower in a year? I very much doubt so. In that case, worst case, I am still the happy owner of a car.

Why might electric and higher-end cars be a good investment during an inflationary period?

Electric vehicles could be a good investment in an inflationary environment, despite the challenges posed by inflation. There are several reasons for this.

1. Electric vehicles are by far considerably more efficient than petrol or diesel cars, consuming less expensive energy.
   
2. Electric vehicles are generally much cheaper to maintain than petrol or diesel cars with fewer moving parts, reducing the need for servicing.
   
3. Electric vehicles have a much lower running cost than petrol or diesel cars because they are exempt from road tax.  

Will car prices drop in 2023?  

It isn’t easy to predict, as many factors discussed can affect car prices. However, if a decrease in car demand or supply imbalances subsides, prices may drop. Factors that could affect the market in 2023 include:

• The economy: If there is a recession or financial crisis, people may be less likely to buy cars.
  
• Technology: If there is an advancement in alternative transportation methods (e.g., self-driving cars, electric cars), people may be less likely to buy traditional cars.
  
• Politics: If there are trade wars or tariffs on imported cars, the price of vehicles may increase. Therefore, it is difficult to say whether car prices will drop in 2023.

Final thoughts — buy a new or used car?

Cars are generally not a good inflation investment as they are a depreciating asset in normal times. I would, however, argue that we are not in normal times. The issues around inflation are not going to go away any time soon. It would appear that, at least in the medium term, electric vehicles for higher-value car brands could be a good investment during this inflationary period. It is how I tried to illustrate, depending on your circumstances.

If you hunt for a new vehicle and want to change in the next two years, putting some money down today to lock in prices could prove a worthwhile consideration. As always, circumstances, of course, can change.

Maybe car dealers might change a clause whereby the pricing of your future car might rise with increased costs. In that case, look out for another inflation asset or, if you still want to buy a car, it’s most likely prudent to do it sooner rather than later.