How Inflation Affects the Cost of Car Ownership

The higher inflation is, the more car ownership costs, particularly when it comes to fuel. The below chart from the Bureau of Labor Statistics shows the year-over-year changes in inflation from 2013 to January 2023.¹ Notice the large increases from 2021 to 2023 for gasoline, electricity, and new vehicles.

Fuel

The price of gasoline has increased the most, rising by 38 percent from 2020 to 2021 and 33 percent from 2021 to 2022. By far, this is the most volatile of financial factors associated with owning a car.

The average per gallon price of retail gasoline in the U.S. was $4.06 in 2022, according to the U.S. Energy Information Administration.²

Here are the prices for unleaded regular gas per gallon from the Bureau of Labor Statistics.

Even electric vehicle owners can’t avoid the effects of inflation on car ownership. From 2021 to 2022, electricity rates increased by 13 percent. And although electric cars cost less to fuel than gas-powered cars, that’s still a significant increase for electric car owners. Here’s how much it costs to fuel different types of vehicles, according to a AAA report.³

Maintenance

In 2022, maintaining a car cost an average of 9.68 cents per mile, but we can expect an inflation rate around 7 percent in 2023.

Insurance

The cost of auto insurance is affected by inflation too — specifically service inflation, medical care services inflation, and new-car prices inflation. Here are the average insurance costs nationwide from 2013 to 2020, according to the National Association of Insurance Commissioners.⁴

The year 2020 was the first year that the average cost of car insurance decreased since 2009. Prior to that, it rose an average of 3 percent year over year from 2013 to 2020, or a total of 24 percent.

During inflationary times, do people delay used- and new-car buying?

New vs. Used Cars

Typically, the number of new and used cars sold remains pretty steady regardless of inflation. From 2015 to 2019, the number of used and new vehicles sold declined only slightly. However, in 2020, new-car sales dipped due to a lack of inventory.

Due to this lack of inventory, many car shoppers had to bite the bullet and buy what was available, despite inflated prices.

Inflation isn’t the only factor that impacts how dealerships price cars. To understand how dealers determine pricing, we have to first consider the factories cars were manufactured in.

Car Invoice Price vs. Dealer Markup

A car invoice price is what the dealer pays the factory for the car. It’s also known as factory, dealer, or car invoice, and is universal among dealers. In other words, factories sell cars to dealerships for the same price, with no negotiations whatsoever.

Each car comes with an MSRP, or a manufacturer suggested retail price, but the dealer can choose to mark up this price to make more gross profit. The new price included a component called dealer markup.

Dealer markup, also known as a market adjustment and additional dealer profit, is what the dealer adds to the MSRP of a vehicle. This is where negotiation comes in. However, you may not be able to get a lower price if there is no inventory of the same or a similar vehicle.

Supply vs. Demand

Price negotiation is possible only when there is a lot of inventory. If inventory is low, the dealer has less incentive to negotiate with customers and offer them discounts from MSRP. Some brands with limited inventory include:

• Acura
• BMW
• Honda
• Hyundai
• Kia
• Land Rover
• Lexus
• Subaru
• Toyota
• Volkswagen

On the other hand, brands with more inventory include:

• Audi
• Buick
• Chrysler
• Dodge
• Infiniti
• Jaguar
• Jeep
• Lincoln
• Ram
• Volvo

The chip shortage amid supply-chain disruptions due to the COVID-19 pandemic caused a rise in car prices. With lower manufacturing capability, manufacturers were producing fewer cars, which meant that dealerships had fewer cars to sell. But while inventory was low, consumer demand for used cars and new cars alike was high, meaning that car dealerships could increase their markups and sell above MSRP.

The current car market has higher prices on cars and trucks, according to the Consumer Price Index, on top of high costs for maintenance and repair. However, the market should stabilize once inventory returns to normal levels in the automotive industry.

Vehicle prices will decrease when the new-car shortage is over. The situation is already improving, with used-car prices decreasing by 3 percent from 2022 to the first couple of months of 2023.⁵ While new-car prices are still increasing, they are doing so more gradually — 10 percent from 2021 to 2022 but only 3 percent from 2022 to January 2023. Hopefully, these downward trends will continue for the rest of 2023 and beyond.

If you’re sure you want to buy a car now and not wait until inventories have expanded, follow these steps to avoid significant markups:

1. Go to a high-inventory dealership. You’ll have more negotiating power if you shop at Buick, Jeep, Lincoln, and Volvo dealerships. The same goes for vehicles that aren’t fuel efficient.
2. Compare prices. Go to several dealerships to see prices for the exact same vehicle.
3. Drop your nice-to-haves. Sure, features like sunroofs and heated seats can be nice, but if your goal is to get your car as quickly and affordably as possible, do without nonessential add-ons.
4. Avoid fees. Particularly if you’re leasing a vehicle, watch out for hidden fees.⁶

According to Kelley Blue Book, these are the cheapest 2022 car models to own.

And here are the most expensive, on the opposite end of the spectrum:

• Acura TLX
• Audi A4
• BMW 3 Series
• Dodge Grand Caravan
• Ford Mustang
• Porsche 911
• RAM 1500
• Subaru Forester
• Volkswagen Passat⁷

Although car insurance is required for car ownership in every state except New Hampshire and Virginia (the two states that don’t require auto insurance), there are ways to save on your premiums:

1. Buy a safe car. One of the factors that car insurance companies use to determine premiums is a vehicle’s safety ratings, so make sure the car you buy has good ratings with the National Highway Traffic Safety Administration and the Insurance Institute for Highway Safety.
2. Use usage-based insurance (UBI). If you drive very few miles, you might save money with pay-per-mile insurance. Additionally, some UBI programs evaluate your driving habits, rewarding you with savings for good driving.
3. Drop coverages you don’t need. The fewer coverages you have, the lower the cost of auto insurance, all the way down to your state’s minimum coverage. But keep in mind that saving with fewer coverages could mean more costs later, especially if you cause an accident.
4. Bundle policies. If you have different types of insurance policies, like home and auto, bundle them under the same provider to save money on both.
5. Get discounts. Ask your agent what discounts apply to you. For example, you could save money by enrolling in paperless billing, having anti-theft equipment in your car, or paying your bill in full upfront.
6. Raise your deductible. The higher your deductible is, the lower your monthly premium will be (and the more you’ll owe out of pocket for a covered collision/comprehensive claim).
7. Drive safely. One of the best ways to keep your car insurance rates low is to drive safely and defensively, avoiding accidents.
8. Maintain or improve your credit. In all but four states (Michigan, Massachusetts, California, and Hawaii), car insurance companies can base your insurance rate on your credit score. Improving your credit score could mean a better rate.
9. Compare prices. Always shop around and get quotes from multiple car insurance companies before you choose one to sign up with.

When most people shop for cars, they aren’t necessarily thinking about the costs over time, just the price right in front of them. However, the spending doesn’t end when you drive the car off the lot; quite the opposite, in fact. And inflation only makes things more expensive year over year. Read more of our car insurance research to learn more.