Is automotive deflation inevitable?

The average US new car costs nearly $50,000 right now and the average electric car price in the United States hit $66,000 last month – a more than 13% increase year over year.

Those numbers combined with high interest rates and gasoline prices will inevitably put a squeeze on consumers. At some point, there just won’t be enough demand to match supply capacity.

The big bet is on technology. Electric cars are easier and cheaper to build and Elon Musk thinks they can get much cheaper still. The problem right now is batteries, which are a large part of the cost of cars. He’s pushing for it though and tidbits of Walter Isaacson’s book on Elon Musk are coming out and one of them is about the $25,000 car.

At a design review session one afternoon in February 2023, von
Holzhausen put models of the Robotaxi and the $25,000 car next to each
other in the studio. Both had a Cybertruck
futuristic feel. Musk loved the designs. “When one of these comes
around a corner,” he said, “people will think they are seeing something
from the future.”

If Musk doesn’t do it, then someone else will. Chinese manufacturers are coming for the global market and Hyundai is also rolling out a small electric car for less than $20,000.

There’s a concerted effort to keep car prices high via SUVs and high-end electric cars but competition is coming in the space and that almost always means lower prices. Tesla is a company that’s not afraid of breaking the mould and there’s a good chance that once the dam breaks, there will be a flood of cheap cars. Maybe a $25,000 compact car wouldn’t have been a big seller when $35,000 cars were the norm, but against a $60,000 price tag, it gets much more compelling, particularly with zero gasoline costs.

For the macro economy, that will be meaningful.

This article was written by Adam Button at www.forexlive.com.



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