Japan Disaster Means Real Sticker Shock

03/25/2011 1:00 am EST


Terry Savage

Author, The Savage Truth on Money

It’s the most basic concept in economics: supply and demand. And it works, whether you’re talking about the price of oil, or corn—or cars.

Toyota (TM) and Subaru (Tokyo: TYO) have announced that they are scaling back production in North America, because of parts shortages resulting from the recent disasters in Japan.

The news comes just as the US economy is picking up some steam, and car sales are recovering. So with constant or rising demand, but less supply, there is only one conclusion: Car prices will rise.

If there are shortages of Japanese-branded cars—whether made here or in Japan—it’s obvious that there will be few incentives on their cars. The second phase of that supply/demand equation suggests that domestic automakers will also be able to raise prices (or will offer fewer deals), since one of their main competitors is not about to cut prices.

Edmunds.com, the auto Web site, analyzed the situation: “We can be sure new car prices will go up as inventory thins out. These shutdowns likely are just the beginning.

“All automakers are just now scrambling to review who supplies every little part. The shortage of any one could shut down an assembly line. Toyota isn't the only one vulnerable; virtually all major automakers have some risks."

Last week, General Motors (GM) shut down a factory in Shreveport, Louisiana due to a shortage of parts from Japan, and this week halted production of engines at a plant in Tonawanda, N.Y.

The car dealers read the same news you do, so they are already on alert to maximize the profit on the cars in their lot. But if you’re in the market for a new car in the coming weeks, and can’t afford to wait until the supply rebounds, you should head to your dealer while the car you want is still in stock, and while there may still be some deals to be had.

That’s exactly what the airlines and other users of fuel did when the Egyptian, then Libyan crises hit. Fearing supply disruptions, they bought immediately for future use— pushing oil prices higher.

Some called that “greedy” or “speculative.” But it was really just a smart reaction to the reality of supply and demand.

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