The rising cost of cars during Covid was largely due to markups from dealers, a Spring study shows.

Right around June 2020, the cost of both new and used vehicles in the U.S. began to shoot up. A number of contributing factors were discussed, pointing at Covid, automakers, even U.S. fiscal policy.

In April, however, the economist Michael Havlin proposed a different hypothesis.

In a report published by the Bureau of Labor Statistics (BLS), he argued that the rise in prices was in large part thanks to major markups imposed not by manufacturers, but dealers.

“What we saw with the supply-chain crisis,” Havlin explained to the Wall Street Journal, “is that dealerships were able to reassert their position as an inventory management system. And dealers are the ones with inventory.”

The reasons behind car inflation

From 2019 to 2021, according to data gathered by The Zebra, the average cost of a new car in the U.S. rose more than $10,000 – from just under $37,000 to just over $47,000.

Drivers looking for a cheaper option only served to buoy the price of used cars as well – from just under $20,000 to just over $28,000, nearly as significant a jump.

What could cause such stark inflation as this? One obvious cause was a shortage in semiconductors.

Modern cars, like any other machines, run on computers, and if the supply of computer chips drops, manufacturers in all technology industries need to bid up to obtain what few there are on the market.

Plenty of other theories were floated.

For example, there was the whiplash between the complete halt of normal life in 2020, and the rush to return to travel in 2021. The same car companies that desperately sold off their inventory one year ended up with too little supply the following.

According to the BLS, however, an undersung contributing factor was the markups imposed by car dealerships.

The role of dealers

As the supply of computer chips dried up, car manufacturing slowed, and fewer new cars were available for purchase. But while automakers struggled, car dealers were well-positioned to take advantage.

“Dealerships have a major role in managing the inventory of unsold vehicles and typically have a significant amount of unsold inventory rotating through their lots and garages,” the BLS report explained.

“By relying on their existing inventories to supply consumers with vehicles, dealerships shrank those inventories and gained more pricing power.” In other words, by keeping inventory low, dealers were able to push prices high.

To determine how much influence dealers had over prices, Havlin compared two datasets: how much manufacturers were charging for their cars during the pandemic, versus how much consumers were paying for them.

The following chart shows the results:

Chart on Havlin comparison

Clearly, there was a direct correlation between the cost of vehicles and the markup imposed between manufacturer and consumer. According to Havlin’s estimates, at the peak of the trend in Sep. 2022, the markup rate hit 17.7%.

That the middlemen had so much influence over the car market just goes to show: no economic trends happen in a vacuum, and all participants have a role to play.

Luckily, today, that trend appears to have cooled down, and cars are beginning to be less obtrusively unaffordable once again.