The impact of inflation on the U.S. automotive industry

Abstract

In recent years, global inflationary pressures have intensified, and the high costs of raw materials, energy, and logistics for production have made the automotive industry face severe challenges in both the supply chain and market demand. Against this backdrop, it is crucial for industry practitioners and policymakers to quantitatively assess the impact of inflation on the automotive industry and find strategies to deal with it. Hence, this study examines the impact of inflation on the U.S. automotive industry, focusing on the short-run and long-run impact of the dynamics of inflation and other macroeconomic variables such as the Producer Price Index (PPI), energy prices, and interest rates on the U.S. automotive industry. In examining the objectives, this study employs the Autoregressive Distributed Lag Model (ARDL) with quarterly data from the third quarter of 2004 to the third quarter of 2024. The findings of the study reveal that inflation has a significant negative impact on the U.S. automotive industry in the long run, indicating that when the aggregate price level continues to rise, consumers' disposable income and consumer confidence weaken, which in turn suppresses the demand for auto purchases. However, the study finds that inflation does not significantly impact the industry in the short run. In addition, changes in energy prices and interest rates also have different degrees of impact on car sales in different periods: in the short term, fuel price fluctuations can magnify the cost of car purchases or prompt consumers to switch to more energy-efficient models; while interest rate increases tend to increase financing costs, but to a certain extent, they also go hand in hand with economic expansion and job growth, which may have a double effect on car demand.

Keywords: Inflation, U.S. Automotive Industry, ARDL, Cointegration