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Planning to buy a car? Global inflation can lead to higher car costs in the future: Here's why Image Credit: Pexels / Gustavo Fring

Dubai: We know that inflation has been pushing up the prices of essential goods such as food and utilities worldwide. But will this also lead to a rise in car prices and other related costs globally?

According to a survey that was conducted over 20,000 people in 30 countries, seven out of 10 people said they have been witnessing an uptick in costs for vehicle fuel, car payments and routine maintenance – aside from the typical upswing seen in the price of groceries, meals and restaurant bills.

Car prices, related costs on the rise globally

Growing inflation is one of the most current issues car buyers and dealers are facing, experts opine. Many industries are having problems due to rising inflation, and the global car industry is no exception.

The reasoning is straight-forward. Inflation directly impacts all commodities and so it affects automobiles too. So, if you want to buy a car and its price was Dh10,000 but after price increase or money got devalued in a couple of months then it will cost you more than Dh10,000.

In other words if a car model gets old, then the value will get down due to competition and manufacturing of new and unique features in new models.

How inflation affects the value of a car
If the value of a car drops from Dh15,000 to Dh5,000 over 5 years and inflation is 3 per cent per year, then the Dh15,000 you payed 3 years ago at 3 per cent inflation is the same as Dh17,390. Then consider that the current value of Dh5,000 represents a prior value of Dh4,293.

So, you have a car you actually paid Dh17,390 in adjusted money and it is now worth Dh4,293 because of inflation. That is an additional loss of Dh3,106 on top of the Dh10,000 loss of equity value, so inflation accounts for an additional 31 per cent loss of buying power.
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Car prices, related costs on the rise globally

Car insurance too is on the rise worldwide: Research

Statistics show that the average cost of car insurance has increased over twice the overall rate of inflation in the past 40 years in most countries worldwide.

Auto insurance rates are rarely, if ever, static; instead, rates fluctuate based on several factors and circumstances. A number of research indicates that, in 2022, the average cost of car insurance rates will possibly rise for many drivers worldwide.

Perhaps the biggest driver of higher 2022 car insurance premiums is inflation. Between December 2020 and December 2021, inflation evidently rose globally, which means that, on average, we are spending more than we were a year ago for the same goods and services.

Similarly, statistics indicate that inflation pounded the new and used vehicle markets in most economies in 2021. The price for new cars and trucks rose between December 2020 and December 2021, statistics further indicate, while the used car and truck market saw a comparatively larger increase.

Why is the cost of car insurance rising globally?
Vehicles are also much more complex than they used to be, which adds to the overall cost of ownership. Even small accidents can cause hundreds or thousands of dirhams worth of damage to delicate electronics that require specialised repairs.

Because car insurance is designed to pay for the costs after an accident, anything that makes these costs more expensive is likely to raise rates. Insurers need to make sure they have enough funds to pay claims, so when inflation hits, car insurance rates are affected.
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Car insurance too is on the rise worldwide: Research

What can I do about inflation’s effects on car insurance?

While some factors may be out of your control when it comes to auto insurance, you do have options to keep your premiums low.

Shop around for more affordable auto insurance and find discounts you didn't take advantage of in the previous year. Taking the time to do an apples-to-apples auto insurance quote comparison may save you money by making a switch to a different insurer.

Your driving record has an impact on your car insurance costs, and these tools help you understand your driving habits. Over time, you might consider changing the type of vehicle you drive and your current insurance coverage.

It helps to revaluate your policy each year, especially if your circumstances change. Also, try bundling your car and homeowners insurance for additional savings. Also, improving your credit score can also help to lower your car insurance premiums.

Inflation’s effects on car owners, auto industry in the long run

• Longer time of ownership

As a result of rising car prices and the higher cost of finance, it is likely that consumers will keep their vehicles for a longer period of time.

This may make sense for the buyer who spends more on his or her car, as pricier brands are built to higher standards and have a higher life span. However, it can also be a detriment to those who prefer budget-friendly cars that often come with harsh depreciation and rampant reliability issues.

This means that people will end up owing more than their car is worth for a good portion of their loan. It also means that they will be paying for more repairs in the meantime.

How will inflation impact car owners, auto industry in the long run?

• Taking the ‘economy’ out of ‘economy cars’

Another consequence is that many once-cheap cars will move up in price. Research shows that this has been witnessed in parts of Europe already.

It is also expected that many new cheaper cars will enter the market, built in countries where labour costs are lower.

Research further shows that the current manufacturing hubs will suffer as a result and countries with lower labour costs that are just beginning their automotive ages will ramp up their production capacities.

• Higher finance rates and longer terms

Higher base prices aren’t the only thing that will raise the price of auto finance. With more manufacturers offering in-house financing, rates are often used to add money to a deal.

Longer finance terms are another way to sell a customer on a lower monthly payment. The issue is, the customer ends up staying in debt longer, and owing thousands more by the end of the term.

But why will the cost of auto loans, car repairs rise?
Rising costs for manufacturers invariably means that money has to come from somewhere. Usually, the consumer ends up paying for it through increased prices. As a result, the cost of auto finance also goes up.

The cost of repairing a car has increased at the same rate as global inflation, which isn’t surprising because repairing a car is primarily labour-intensive. While the technologies inside the car have changed, the need for a good mechanic hasn’t.
Is this the right time to buy a car?

Bottom line: Is this the right time to buy a car?

Here are some tips on how to stay clear of inflation when buying a car.

• Research further shows that the current manufacturing hubs will suffer as a result and countries with lower labour costs that are just beginning their automotive ages will ramp up their production capacities.

• Although avoiding the effects of inflation might be impossible, it’s important to know which car segment it’s having the largest impact, so you know what categories of spending you may want to scale back on.

• Purchasing and owning a car has always been an expensive affair, which makes it a significant financial decision. Because of everyone’s unique situation money-wise, the most prudent time to buy a car varies.

• While you might be feeling the squeeze when it comes to buying a car, keep in mind that inflation hasn’t impacted all categories of cars equally worldwide.

• However, if you do notice car prices and related costs rising, you might also consider renting or leasing a car until the prices dip again.

• If you already have a leased car, it might be a good time to give the car company a call and ask for an extension on the lease.

Also read

Checklist: What to consider in order to cost-effectively buy a car
There are two factors that help determine when to pull the trigger and which vehicles fall within your price range: affordability and your budget. While there are peak seasons and discounted holidays for car sales, it’s best to purchase a car when you find a deal within your means and one you can afford.

In addition to keeping an eye out for dealer promotions, the car manufacturers themselves typically offer a mix of one-time and recurring incentives that might apply to you.

Some dealers offer auto loans at a low introductory rate for a period of time which can save you money on interest. However, manufacturers usually require that you have a strong credit rating and borrow the money from their financing company to qualify for the promotional interest rate.