Great ResignationInflationSupply ChainsLeadership

Did inflation turn driving into a luxury good? A shrinking middle class is reshaping the American car market

July 13, 2022, 6:18 PM UTC
Fuel is getting more expensive
It's expensive to buy and fuel up a car these days. Enter more luxury cars.
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The auto industry has struggled with supply-chain disruptions brought on by the pandemic and a shortage of new cars, but the luxury car market is thriving through it all. 

Purchases of luxury vehicles accounted for 18% of total car sales in June, up from 17.3% a month before, according to new data released Tuesday from Kelley Blue Book, a Cox Automotive company. On average, buyers paid $66,476 for each new luxury vehicle—the highest price ever recorded. 

According to the latest Consumer Price Index (CPI) report Wednesday, ​​which showed the highest inflation in 40 years, new-vehicle prices rose 0.7% in June compared to last month, while used-car prices rose 1.6% over the same period.

As luxury vehicles make up an increasingly larger share of sales, they have pulled the average transaction price for all new vehicles up to a record $48,043. That equates to more than 46 weeks of median earnings for the typical full-time worker and has increasingly left only wealthier Americans willing to pay out for a new car at the moment. By comparison, the Pew Research Center estimated in 2018 that one-fifth of Americans live in upper-income households, making more than double the national median. In other words, as the upper (and upper-middle) class grows, so does the percentage of luxury cars being sold.

“While affordability relative to the median household has never been worse, for the demographics that now dominate the new-vehicle market, affordability is not an issue,” Cox Automotive’s chief economist, Jonathan Smoke, told Fortune

Electric vehicles, too, have inched into luxury price territory as high gas prices lead more drivers to consider making the switch to a more fuel-efficient option. The average price for a new electric vehicle exceeded $66,000 in June—a 3.8% increase from the month prior and 13.7% from a year ago, according to Kelley Blue Book estimates. 

In the U.S. luxury car space, Tesla currently leads sales, beating out Mercedes-Benz and BMW. Elon Musk’s EV giant contributed 21.6% of total U.S. luxury sales during the first half of this year, according to Experian data reported by Automotive News. By June, Tesla customers registered nearly 180,000 vehicles, while BMW and Lexus customers registered over 133,000 and 112,000 luxury cars, respectively, according to Experian. 

Consumer demand for cars remains strong despite monthly payments hitting record highs, sometimes beyond rent levels, and automakers facing continued supply issues

That combination has allowed most dealers to sell their low inventory above the manufacturer’s suggested retail price. Just a year ago, luxury vehicles sold for around $825 under the sticker price. In June, the average luxury buyer paid $1,069 above sticker price, and new vehicles from brands like Mercedes-Benz and Kia sold for up to 8.7% over, according to Kelley Blue Book data.

Michelle Krebs, executive analyst at Cox Automotive, told Fortune she expects new cars to stay expensive for a while. 

“We are seeing no improvement in inventory levels and continue to see strong demand for vehicles. Continued low supply and high demand will keep prices high,” she said. “In addition, when the new model year starts, usually by fall, those vehicles come automatically with higher prices and no discounting—because they are new.”

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