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What's the Deal With These
Sky-High Car Prices in
2022?

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Have you been wondering why brand-new cars are so expensive these days? You're not alone. New car prices have ballooned by 12.4 percent year on year, according to the Consumer Price Index published last February. These inflated prices are the result of semiconductor shortages, supply chain problems, and high dealer markups. Industry analysts are saying that market trends are likely to continue for the next few years until supplies meet demand. This isn't the kind of news that car buyers are hoping to hear. However, if you're serious about buying a car these days, here are some things you should know.

raising prices

Why Are Car Dealers Raising Prices Over MSRP?

Fewer cars are getting made due to the global chip shortage. Ford Motor Co. has announced plans to suspend production at eight of its factories due to supply constraints. Though fewer vehicles will make it onto dealer showrooms this year, consumer demand remains high.

Dealers are taking advantage of the market disruption by raising the prices of new vehicles. According to Kelley Blue Book, the average cost of a new car in the United States is $46,085. That's $5,000 higher than a year ago. Some analysts believe that this trend will continue until demand is met.

Is it legal for dealers to raise new car prices well above the manufacturer's suggested retail price (MSRP)? Yes. There are no federal laws explicitly prohibiting dealers from boosting car prices. Even though some automakers don't agree with this practice, they still have to follow the traditional franchise dealer model to sell their inventory in the US.

automaker

Automaker

The automaker is responsible for manufacturing vehicles and for allocating inventory to their dealer network.

car dealer

Car Dealer

The dealer signs a franchise agreement with the automaker. Once approved, the dealer is given inventory that they can sell at any price they desire.

bank

Bank

The dealership receives financing from a bank to buy inventory from the automaker. This process is called “floorplanning.”

customer

Customer

The customer purchases the vehicle at the dealer’s price. The dealer isn’t required to follow the MSRP when selling inventory.

Certain franchise dealer laws prohibit automakers from selling vehicles directly to customers. Automakers have to enter a franchise agreement with dealers to allocate their inventory and make a profit. They usually provide their dealers with the suggested retail price for each vehicle, but their dealers are free to sell their inventory at whatever price they want. Some dealerships can also raise the cost of a vehicle by including accessories, insurance, and other dealership add-ons.

Which Vehicles Have the Highest Markups?

US inflation is the highest it's been in four decades due to high demand and supply constraints. Food, gasoline, and housing prices have all increased dramatically, pushing inflation rates to record highs. It's affecting the auto industry as well. New truck prices are up by 12.4 percent, while new car prices have risen by 12.1 percent. Used vehicle prices have increased by more than 41 percent compared to a year ago. A report from Edmunds indicates that a majority of American buyers are paying over MSRP.

According to iSeeCars.com, the average new vehicle is currently priced 9.9 percent above MSRP, which translates to a $3,753 premium above the sticker price. If you’re looking to save money on a new vehicle, you should probably avoid the following models. Here are the top five vehicles with the highest markups.

Note: The following figures are taken from iSeeCars.com's analysis of 1.2 million new cars listed for sale between February 1 and March 25, 2022. It compares list prices of new cars to their MSRP, excluding low-volume and heavy duty vehicles.

jeep wrangler

Jeep Wrangler

  • Percent Above MSRP: 26.7%

  • Dollar Amount Above MSRP: $8,925

The Jeep Wrangler remains a popular choice among American buyers because of its versatility and ruggedness. The Jeep Wrangler has the lowest depreciation of the 800,000 vehicles evaluated by iSeeCars.com, at 9.2 percent over five years, compared to an average of 40.1 percent.

ford maverick

Ford Maverick (Hybrid)

  • Percent Above MSRP: 25%

  • Dollar Amount Above MSRP: $5,601

The Ford Maverick debuted in 2022 to high demand, causing dealers to stop taking orders for it at the end of January. Both hybrid and gasoline versions of the Maverick offer excellent mileage, which can help owners save money on gas. Even with high dealer markups on new cars, the Ford Maverick remains a viable option for customers because of its buyer-friendly starting price of around $20,000.

porsche macan

Porsche Macan

  • Percent Above MSRP: 23.3%

  • Dollar Amount Above MSRP: $13,254

The Porsche Macan has the third highest markup on the list at 23 percent. Because the Macan is Porsche's most popular model, dealers are charging more than MSRP due to the lack of inventory. Despite being the most expensive vehicle in its class, the Macan continues to draw clients prepared to pay above the sticker price.

jeep wrangler unlimited

Jeep Wrangler Unlimited

  • Percent Above MSRP: 22.9%

  • Dollar Amount Above MSRP: $9,534

The four-door Jeep Wrangler Unlimited provides more passenger and cargo space than the standard Wrangler. The Unlimited is a little more expensive than its base model, but it holds its value well over time. Because of supply constraints, some dealers are raising prices by $2,000 to $10,000 above MSRP.

jeep gladiator

Jeep Gladiator

  • Percent Above MSRP: 22.5%

  • Dollar Amount Above MSRP: $9,824

The Jeep Gladiator also makes the list at a 22.5 percent markup above MSRP. Despite rising gas prices, the Gladiator continues to be a popular vehicle among consumers due to its toughness and off-road capabilities.

What Are Automakers Doing About This?

Franchise dealer laws are different in each state. Alabama's franchise law prohibits automakers from selling or leasing vehicles directly to consumers. Colorado's franchise law is the polar opposite, allowing manufacturers to own, operate, or control a motor vehicle dealer under certain conditions. There are states like Alaska and Hawaii that don't have clear statutory provisions forbidding automakers from engaging in direct-to-customer (DTC) sales.

Carmakers could enforce a price cap in their franchise agreement if they really wanted to protect their customers. However, the chances of this actually happening are slim because the price hike benefits both manufacturers and dealers.

Most manufacturers sell their vehicles through franchised dealerships to avoid breaking any federal laws. They have little influence over how much their dealers charge. Tesla doesn't have this problem because it employs a different business model from other automakers. Tesla has its own showrooms and galleries where customers can learn about the company and its vehicles. Customers can purchase vehicles through the Tesla website, which improves the overall buying experience and protects consumers from high dealer markups. Tesla has faced multiple dealership disputes in the past due to its direct sales strategy, which undermines some federal laws on franchise dealerships. Ten states have banned the sale of Tesla automobiles, while eight others have set a limit on the number of Tesla showrooms that can be erected within their boundaries.

automakers

Will This Encourage More Makers to Go DTC?

Online shopping has disrupted the traditional car market. Some customers are foregoing traditional dealerships in favor of online auto retailers such as Tesla, which provide reasonable prices for their vehicles. According to Cox Automotive, nearly 85% of car buyers would prefer to buy from a dealership that allows them to start or complete nearly all of the vehicle buying process online.

Will other carmakers follow Tesla's lead and adopt a DTC strategy to reach more customers? The answer is uncertain. Some manufacturers are developing electric vehicle goods in order to expand their customer base in states where electric vehicles can be sold directly to consumers.

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