Inflation rockets as the world recovers from the pandemic and faces new challenges. Everything might seem more expensive nowadays—from buying a car to doing your weekly grocery shopping. Consumer price inflation recently hit 6.1%, but what does this mean for car prices? Will you pay more upfront? And what about running costs? How does inflation affect car loans?
We'll answer all your questions and more in this comprehensive guide to inflation and the cost of buying a car in 2022.
Inflation refers to rising prices as purchasing power declines. When demand outstrips supply, prices go up. Everything, from construction to sales, faces more pressure under increasing demand. Consumers have fewer choices or bartering power. Sellers have more control.
When prices go up, the value of the currency decreases. So, for example, let's say a car costs $20,000 in a healthy economy. When inflation reaches 5%, the vehicle cost will go up 5%, costing $21,000.
While it might seem like you pay more (and some people might), the currency loses value as inflation increases. If your wages also increase by 5%, then proportionately, you're not paying more for the car. However, many people don't have the luxury of a significant pay increase at the rate of inflation and suffer from rising prices.
Inflation is a natural part of the economy. Over the years, inflation fluctuates as the economy grows and shrinks.
The covid-19 pandemic changed many things about the world. Buying cars became more expensive during the global health crisis—and prices haven't decreased. On average, car prices have increased 5.5% since 2021. Some manufacturers' prices increased by 17%, and specific models went up by 40.3%.
Today, Australia's average new car price costs $40,729, including taxes, fees, and car loan interest. The most expensive cars are in Western Australia and the cheapest are in Tasmania. But, how do these prices compare to two or more years ago?
If the average car price today is around $40,000, this time last year, you could have paid approximately $37,800 for the same vehicle. Moreover, when you calculate car loan interest on the extra $2,200, you could pay an additional $263.61 in interest (based on a three-year term and a 7.5% rate). We'll explain more about the relationship between interest and inflation later.
Inflation refers to the general increase in prices and decrease in currency value. Unfortunately, price rises tend to increase before wages go up. Therefore, many Aussies will find themselves paying more for goods than they did a year or two ago. Over time, inflation causes prices to go up steadily. However, in 2022, we're seeing a sharp rise in inflation.
Other than inflation, what impacts the cost of cars? When demand overtakes supply, prices go up. Over the last few years, car supply has struggled to maintain normal production output. And yet, more and more people want to buy new or used vehicles.
It's not just new cars that have increased in price. Used vehicles are similarly more expensive now than they were a few years ago. Inflation affects all aspects of life—new and used products go up in price. The average used car price is $33,000—not much below the cost of a new car.
Industries hit by covid will take time to recover, and with new inflation challenges, used car prices might not come down any time soon.
Buying a car is more expensive today than before, and car running costs are similarly much higher.
With car prices going up, you'll want to avoid the pricier end of the range. The most expensive cars to buy in Australia in 2022 are:
However, consider running costs and financing. If buying a brand new, fuel-efficient (or electric-powered) car will save you money down the line, it's worth considering choosing the pricier vehicle over a cheaper, used car.
In the current cost of living crisis, most people will prefer more affordable vehicles. While cars have increased in price, there are plenty of affordable options to get your hands on. Moreover, if you're interested in purchasing a cheap family car, consider buying sooner rather than later. As inflation continues, car prices will go up further.
The cheapest cars in Australia to own and run:
The upfront cost of your new or used car isn't the only expense. When you apply for a car loan to pay for your new vehicle, you will need to consider interest costs. The interest rate is similarly affected by inflation.
To battle inflation, the RBA raises the cash rate to 3.1%. Lenders and banks use the cash rate to inform their interest rates. When the cash rate goes up, interest rates increase. Higher interest rates discourage spending, which limits the impact of inflation.
The RBA sets the cash rate on the first Tuesday of every month (except January). If the last five months suggest anything, we might expect rates to continue to increase over the next few months, if not years.
However, higher interest rates could mean you pay more for your vehicle. On top of rising costs because of inflation, you could spend much more on interest repayments. Since May 2022, interest rates have gone up 2.75%. Furthermore, there is a reason to suggest interest rates will continue to increase.
Should you lock in a fixed-rate car loan before interest rates continue soaring?
Variable rate car loans fluctuate with the cash rate. When the cash rate goes up, your interest rate will go up. Similarly, when the cash rate decreases, you pay less interest. The amount of interest you pay will vary from month to month. In a healthy economy, this could save you money. However, as interest rates rise, you might find your variable-rate car loan gets more expensive over time.
Fixed-rate interest car loans mean you pay the same amount of interest every month, regardless of the cash rate. Fixed-rate loans typically have higher interest rates. However, when the cash rate rises, you might pay less than those with a variable-rate loan.
Securing a fixed-rate car loan now could save you money in the future when the cash rate goes up again.
Buying a car is a significant financial commitment. Whether you buy a used car with cash or pay for a new vehicle on finance, you want to get the best deal possible. Yes, cars are more expensive than they were a year or two ago. Inflation has pushed prices up in all corners of the market—from loan interest rates to fuel costs and insurance.
The car industry might soon recover from the pandemic and supply chain disruption, but demand is unlikely to dwindle.
Moreover, inflation is likely to continue to increase over the coming months and years. Moreover, as inflation hits, interest rates will also soar. Purchasing your dream car now might save you a fortune down the line.
Consider the right car. While cheaper, used cars might cost less to buy, newer electric vehicles could save you fuel costs. Speak to an expert to ensure you make the best car-buying decision for you.
Contact an expert car finance broker today to find out how you can secure a competitive interest rate before inflation pushes car prices up higher.