Tracking Tariffs

The uncertainty around tariffs comes when car shoppers are already navigating many challenges. New car prices are still elevated at an average of $49,000 and monthly payments are strained even more with rising insurance premiums and high loan rates. The one-month delay on Canadian and Mexican tariffs comes as welcome news for now, but questions remain around the future of pricing for these vehicles.

The recently enacted tariffs on China will be less disruptive than the currently delayed tariffs. However, we could still see an increase in vehicle costs in select cases.

Unlike Canada and Mexico, which produces about 25% of cars sold in the US, China plays a much smaller role in our inventory mix, accounting for under 1% of total US sales. Where we might see a greater impact is on the cost of automotive parts, which could impact the price of new cars and auto repair costs if suppliers don’t have alternatives or other producers start seeing an uptick in demand.

Further compounding consumers' calculus, the recently enacted 25% tariffs on imported steel and aluminum could lead to higher prices for vehicles manufactured in the United States. This situation further exacerbates affordability concerns for both consumers and automakers, as 42% of new American-made cars are currently priced above $50,000.

In the short term, this uncertainty could lead to a spike in new car demand as consumers rush to purchase models before tariffs potentially increase prices by thousands-especially as spring seasonality drives even higher demand and prices starting in March.

Used retail sales demand remains robust

Q4 2024 saw unseasonably strong used sales demand. Factors such as decreasing vehicle prices, cooling interest rates, a post-election release in spending, and overall pent-up demand kept used vehicle sales flat at a time when demand normally cools to its lowest levels. The question entering 2025 was: could this demand continue, or did we see a potential pull ahead in demand from shoppers locking in purchases before the change in administration?

Preliminary January data suggests this earlier than usual rally might have legs and could set up dealers for a robust spring selling season. The CarGurus Used Vehicle Demand Index for January saw readings increase 2.9% month-over-month and 8.2% year-over-year. Dealers have been acquiring fresh inventory to restock their lots, which is driving down time-on-lot metrics. This underscores the importance of inventory acquisition to be able to meet demand.

New inventory rebalancing

January saw new inventory levels cool for a second straight month. While December's dip could be tied to a surge in sales demand normally seen at year-end, January exhibited a more typical sales level for this time of year. What we’re likely seeing is an effort by automakers who saw their inventory levels swell too much in 2024 trying to rebalance inventory to find a healthy new normal and decrease dependence on incentives to drive demand.

While automakers with a high market days supply are the obvious targets for inventory rationalization, we’re seeing most automakers keeping an eye on inventory levels. Even with these efforts, we’ve seen new inventory levels rise nearly 17% year-over-year while vehicle demand is up nearly 10% over the same period. As sales look to be approaching their post-COVID range, it’ll be on automakers and dealers to strike a healthy balance with supply.