On inflation and its impact on new vehicle sales

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July 12, 2023 by Adam Malik

On inflation and its impact on new vehicle sales​

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The Bank of Canada being one of the quickest in the world to move on tightening monetary policy has paid off, according to an automotive industry expert.

As a result, inflation has fallen. It had been in an elevated space for an extended period of time but has come off the heights it once was, noted Guido Vildozo, senior manager of Americas light vehicles sales forecasting at S&P Global Mobility.

In May, Statistics Canada reported that inflation had cooled to 3.4 per cent, which is under the OECD average of 6.5 per cent and the G7 average of 4.3 per cent.

On July 12, the Bank of Canada raised its key interest rate to 5 per cent as “excess demand and elevated core inflation are both proving more persistent.” It further noted that it expects inflation won’t come down to its target of 2 per cent until the middle of 2025.

When inflation cools and interest rates come down are essential for new car sales — when both happen could push numbers to a pre-pandemic pace.

“This is very important for new car sales, because of the fact that we’re heavily dependent upon credit,” Vildozo said of lower interest rates at AIA Canada’s National Conference recently.

S&P figures vehicle sales will hit 1.7 million this year based on first-quarter numbers. DesRosiers’ numbers from June put that figure at about 1.64 million units. New car sales in May and June have been well ahead of last year’s numbers, signalling that consumers are choosing to buy new as inventory replenishes and despite higher interest rates.

Vildozo noted that semi-conductor availability will likely limit Canada to about 140,000 unit sales per month (Canada sold about 160,000 units in each of May and June, DesRosiers reported). If that stands, that means Canada can at most sell fewer than 1.7 million units.

In the years leading to the pandemic, the market in Canada sold upwards of 2 million units. But with headwinds like component shortages, higher inflation and higher interest rates, Canada will be challenged.

“This is great news if you’re in the aftermarket businesses because it means a lot of people are going to be holding on to their vehicles for much longer. So enjoy it and make sure you jack up your prices now,” he said during the session Canadian outlook and driving to an electric vehicle future.
 
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