Why have car prices gone up so much?

Car prices have risen sharply in recent years, which we have all noticed as drivers. However, it is more difficult to understand by how much and why the prices of the cars we drive have increased. A study carried out last year by the company Transport&Environment showed that the main European manufacturers increased the prices of their basic models by 41 percent. But let's try to better understand the scope of this phenomenon and the reasons for it.

Golf costs almost twice as much as it did 20 years ago

For a more concrete example, we took the Volkswagen Golf, one of the best-selling models in Europe, and compared today's German price list with that of ten and twenty years ago. In 2004, the basic version of the Golf 5 cost at least €15.220, but in 2014, the price of the Golf 7 started at €17.325, which is "only" a 10,6% increase. The biggest price jump, however, can be found on the popular Volkswagen's 2024 price list: €28.330, which corresponds to an increase of 70,8% compared to 2014 and 89% compared to 2004.

Golf 2004 – 2014 – 2024

However, it should be noted that the base versions of the Golf 5 and Golf 7 models were three-door, and air conditioning was not standard in 2004. Corresponding five-door models cost €2004 in 15.915 and €2014 in 18.225. We used these prices for our main image. From 1984 to 2000 (that is, in just 16 years!) the price in German marks of the Golf model also doubled: from 13.490 to 26.900 marks. In addition to significantly more equipment in the 2024 Golf, more power is also available in the base model: 116 hp from the 1,5-liter turbocharged gasoline engine, compared to 75 hp in the naturally aspirated 2004 model.

In short: if you want to buy a basic Golf model today, you have to shell out almost twice as much for it as you did ten or twenty years ago. This is, of course, the result of the ever-present inflation, which currently stands at 1,9 percent in Germany, and reached its highest value in 2022, when it amounted to more than eight percent. What are the other reasons? Let's find them together.

The microchip crisis

One of the main reasons for the price increase is the lack of microchips. The pandemic halted or slowed semiconductor production between 2020 and 2023, slowing vehicle production. This reduced the supply, increased the demand and thus also the prices of cars. Integrated circuit manufacturing plants, mostly concentrated in eastern countries such as China, Taiwan and South Korea, have not yet been joined by chip factories of equal size in Europe (although they are planned), so the automotive market is still dependent on imports, with which are associated with supply problems in case of international crises.

Rising costs of raw materials

According to JP Morgan, almost half of the increase in new vehicle prices is due to rising input costs such as raw materials. Although the costs of steel, aluminum, copper and plastics peaked in 2022, the high costs (depending on location) of transportation, logistics, labor and electricity that suppliers pass on to automakers remain a problem.

To this must be added high inflation rates in various parts of the world, which affect the production costs of cars and thus consumer prices. Nominal wages in Germany were currently 2024% higher in the second quarter of 5,4 than in the same quarter of the previous year. Consumer prices rose by 2,3% in the same period.

According to the data of the Federal Statistical Office (Destatis), real wages were thus 2024% higher in the second quarter of 3,1 than in the same quarter of the previous year. With this fifth consecutive increase, the positive trend of real wage growth continued. In the quarters from the end of 2021 to the beginning of 2023, employees on average still saw a decline in real wages.

Fewer cars sold, more profit per car

The decline in car sales, which began in 2020 and is still far from pre-pandemic levels, has another effect on the price list. Fewer cars sold means less profit for automakers, who are therefore looking to increase margins per car delivered. This means that they need to make more profit on each car sold to maintain high profits and distribute it to members by increasing the list price to achieve the same or higher profit than before the pandemic.

Environmental regulations

Added to this are increasingly stringent environmental regulations in Europe, which are forcing car manufacturers to invest in low-emissions technologies such as sophisticated exhaust reduction systems and more efficient engines. Stricter restrictions on fuel consumption and CO2 emissions, which will apply from 2025, also play an important role in this.

In our opinion, it is not out of the question that clean combustion cars will become even more expensive in order to shift customer demand towards plug-in hybrids and electric cars, which will help reduce the large fines for car manufacturers. The de facto ban on cars with internal combustion engines, planned for 2035, has also encouraged large corporations to invest billions of euros in the development of a new electric car industry, including expensive giga-factories for the production of batteries.

Driving aids and safety systems

In recent years, the European Commission has made it mandatory for newly registered cars to use a number of safety and driver assistance systems (ADAS), which has led to an increase in vehicle prices. These are important functions for road safety, such as automatic emergency braking, lane keeping, driver fatigue detection or the eCall system.

To this must be added the increasingly strict EuroNCAP criteria for awarding the famous five stars in crash tests. All this comes at a price, as the components, technology and integration of these new ADAS systems increasingly affect the final price of the vehicle.