Aaron Turpen: Know Why New Cars Are Expensive? It’s Not Just Greed

Cowboy State Daily automotive writer Aaron Turpen writes: "So why are new cars so expensive? The short answer is inflation plus shortages plus the base model effect. The long answer? Well, keep reading."

Aaron Turpen

September 23, 20227 min read

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By Aaron Turpen
Cowboy State Daily automotive writer

Statistically, most people in the U.S. buy a new car about every six years. So if you’re looking for a new car now, be ready for some sticker shock. The good news is that used car values are pretty high, so some of that shock might be of lower voltage if you’re trading something in.

So why are new cars so expensive? The short answer is inflation plus shortages plus the “base model effect.” The long answer? Well, keep reading.

The greatest culprit is inflation. And that won’t be fixed by any of the political or central banking schemes being used to try to slow it down. Why? Well, mostly because we run everything on credit. From our own households to the federal government, our economics are based entirely around promises to pay.

This means inflation and it has meant that for most of the lifetimes of every American alive today, we’ve had currency inflation. Lately it’s gotten worse, but that’s hardly the reason new car prices are so high all by its lonesome and it doesn’t mean they’ll go down if the Fed “corrects” well enough.

Starting from 2016, the U.S. Dollar has seen 23.40 percent cumulative inflation, or loss in value. So anything you bought in 2010 would now cost 1.234 times as much.

Thus if you bought your current vehicle six years ago for $35,000 and are planning to buy a new one now, you can expect to pay at least $43,190 for it. Entirely because of inflation. Blame Washington, but remember who votes and who has voted for the last 100 years. It doesn’t matter who is in office, inflation happens.

On top of that because of vehicle inventory shortages due to electronic sensors, chips, and other things being harder to get for various reasons (including COVID, the war in Ukraine, and supply logistics problems), you can expect to pay even more.

Yes, even beyond the inflation as your dollars lose value by the day, you can also expect to pay more at the dealership because there are more people looking to buy cars than there are selling them. The upside to this, as mentioned before, is that your trade-in will also likely have a much higher value.

The window sticker on the car, which lists the manufacturer’s suggested retail price (MSRP) for the vehicle (among other things) is only a starting point for purchase.

As most people know, negotiations generally start with that as a baseline and then things move up or down from there. Currently, they mostly move up. Thanks to shortages. But many remember the heyday of a few years ago when it was the opposite: the number usually went down.

There were cash incentives, dealer markdowns, special package deal offers, and more. Not to mention discounts for first responders, military members, “friends and family” of the dealership or automaker, and so forth. Those markdowns are, by and large, no longer available. At least, not in the way they used to be.

They no longer subtract from that MSRP. Instead, they might subtract from the dealership’s own “market value” add-on price over and above MSRP. If they’re offered at all. There are plenty of stories to be found in online forums of buyers who, despite the markups, decided to buy the vehicle anyway and were to have a markdown based on their status. Only to find out that their new car had been sold out from under them. To someone who wasn’t getting a markdown.

Welcome to capitalism. If you aren’t willing to accept its downsides, you shouldn’t tout its upsides. Kinda like free speech, the second amendment, and all the rest of our freedoms. Not everything is roses.

So here we are with new car prices being much higher than they were the last time you were in a dealership. But wait, there’s more.

This one’s been around since time immemorial. Marketers often call it the “Base Price Effect.” This is the totally legal practice of advertising the base model’s price but never actually having a base model available on the lot. Every dealership does this. And manufacturers often monkey with the numbers to propel this trend.

The “base price” that’s often advertised for a vehicle is for the model that has absolutely no added features, whizzbangs, or content. It’s the absolute cheapest option possible for the vehicle. Do you want to guess how many base models of any given vehicle are actually sold in a given year? If you guessed “almost none,” you’re right. Even rental car agencies don’t buy purely base model vehicles.

But that base model price of $29,999 sure does look great if your new vehicle six years ago cost you $35,000, eh? Because our eyes don’t see the small print that says “starting price” or “starting at” or “base model not shown.”

Even if we’re aware that it’s just the base model’s price and ours would cost more, we will still have dreamy thoughts about how if we apply a couple of discounts.. Perhaps pull off some good haggling.. Maybe throw in that we’re pre-approved for credit on the buy.. And do a really good job cleaning up the trade-in.. And really show that salesman who’s boss.. We’ll get it for close to that price, but it’ll be a way better than base model car. Totally doable.

Good luck, Chuck, cause that’s not gonna happen. Instead, you’re going to be told that the base model is hard to get because Russia screwed over the supply chain, the manufacturer has all those base models tied up in rental fleet sales for a while, and that stupid politician makes importing that car to Wyoming too unrealistic at the moment.

Whatever the reason, it won’t be the dealership’s fault for sure. It’ll be why they don’t have any and probably can’t get you one. Not soon, anyway. Maybe a couple of months if you’re OK waiting. But hey, there’s this other one on the lot that’s only got a few options added. Let’s go look it over while you think about it.

And that model they show you? Yep, $43,000 and change without any dealer markups. But there is a $1,200 delivery fee that they can’t drop and a $400 service charge for the processing. Oh and that $80 to fill its tank for you.

Right and don’t forget the $1,800 in “sorry, already added and we can’t remove it now” dealership gear thrown on. You know, the plastic do-dads and upgraded this-thats and whatnot. But hey, we can work a deal here. You say you’re pre-approved?

So long story short is that right now, new vehicles (and used ones for that matter) are a seller’s market. Buyers will have to pay. But think of it this way: six years ago when you purchased that car at 0% interest and with a $5,000 cash-on-the-hood incentive to purchase, you didn’t complain.

Well, now it’s the dealer’s turn. Those heady days of cash incentives and markdowns were great while they lasted. It’s anyone’s guess if they’ll ever be back.

Aaron Turpen is an automotive journalist living in Cheyenne, Wyoming. His background includes commercial transportation, computer science, and a lot of adventures that begin with the phrase “the law is a pretty good suggestion, I guess.” His automotive focus is on consumer interest and both electronic and engineering technology. Turpen is a longtime writer for Car Talk and New Atlas.

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Aaron Turpen