Following Wednesday’s Federal Reserve announcement that it will soon hike interest rates and a U.S. Commerce Department report this week that the supply of semiconductor chips for automakers has fallen to alarming levels, we look at how car prices are likely to be affected.

Last year, the computer chip shortage, global supply chain issues and labor shortages prevented automakers from making enough vehicles to fulfill demand, driving prices for both new and used cars to unprecedented levels.

Here are five things to know about expected car prices

  1. New and used car prices rose dramatically in 2021. The average transaction price for a new vehicle sold in December was $47,077 — a 23% increase compared with a year earlier. The average list price for a used car was $27,569, representing a 27% annual increase.
  2. The auto market continues to be restrained by tight inventory, according to a report from Cox Automotive released Wednesday. New-vehicle inventory is starting 2022 down 61% compared with 2021. There are 1.2 million fewer vehicles available at the start of 2022 compared to the start of last year. 
  3. New vehicle sales are expected to be 9% lower in January compared with a year earlier and 17% lower than December.
  4. Prices for new and used vehicles are expected to continue increasing, though the rate of increase will slow as automakers increase their supply of new vehicles. Still, Cox Automotive anticipates the new vehicle supply will increase by just 5-7% over the course of the year.
  5. Demand for vehicles will increase before the Fed’s rate increases as car buyers look to lock in lower financing rates. The hike in interest rates is likely to drive up prices before they kick in this spring since supply for both new and used vehicles will still be tight.