How Rising Inflation and Global Uncertainty Are Reshaping the Automotive Market

On April 30th, in announcing its decision to hold interest rates at 3.75%, the Bank of England said the UK may need to brace itself for interest rate increases later this year, as “higher inflation is unavoidable” as a result of the war in the Middle East.

For consumers and businesses, the rise in oil prices following the outbreak of war in the Middle East has already pushed up petrol, diesel and utility prices. The cost of filling a typical family car with petrol has risen by around £14, while a tank of diesel has jumped by £27, according to RAC Fuel Watch. 

Now, the knock-on impact is being felt in the form of rising costs across a broad range of products and services. This situation is being worsened by disruptions to key shipping routes, notably the Strait of Hormuz, which connects the Persian Gulf to the open sea. This is a crucial supply route between Europe and the Far East, affecting much more than just oil. We saw after Covid how distribution disruptions affected the supply of new cars when the supply of essential semiconductors and other parts dried up.

There have been signs that forecourt prices have eased slightly. However, they remain highly volatile, and inflation, which was forecast just a few months ago to fall to 2% by the middle of the year, is once again on the rise, reaching 3.3% in March, with further increases expected.

• The cost of petrol and diesel is likely to remain volatile.

• The cost of vehicles and vehicle parts will rise.

• Lead times for new cars may increase.

• The type of cars people buy may change - Renault reported a ‘seismic shift’ in electric car interest after oil prices surged.

• A rise in broader running costs, including servicing, repairs and insurance, is inevitable.

In the used car sector, we have already seen a trend towards older models, driven by stock shortages stemming from the post-COVID decline in new car supply. As well as the impact of rising inflation and the risk of higher interest rates on consumer buying decisions, for some, that decision may be to defer a purchase. Even then, the impact of inflation will be seen in higher servicing and repair costs.

According to the Office for National Statistics, overall car maintenance costs rose 7.4% year on year in March, up from 5.6% in January, though some costs are significantly higher, driven by:

• Rising Labour Costs: Increased garage labour rates are adding £20–£40 to standard repairs, with hourly rates rising sharply.

• Surging Part Prices: The cost of components—including oil, steel, and electronic parts—has escalated due to global material prices.

• Energy and Overheads: Businesses have faced higher utility bills and operating costs, which are passed on to consumers.

• Skills Shortages: A shortage of technicians is pushing up wages and, consequently, labour charges.

These trends are likely to be further affected by the situation in the Middle East. 

These conditions can have important implications for the purchase of optional add-on products. 

As consumers hold onto vehicles for longer, demand for warranty products may rise. Older vehicles carry a higher mechanical risk, and in an inflationary environment, repair costs are increasing. This means:

• An increased relevance for warranty products as vehicles age.

• A greater focus on comprehensive and longer coverage.

• An opportunity to position warranties as a hedge against rising repair costs.

Whilst vehicle values remain elevated, consumers may also be more motivated to maintain their vehicles' appearance, particularly when resale values are strong. This can mean:

• Demand for cosmetic repair products.

• A greater emphasis on the speed, convenience and quality of repair services.

For distributors of ancillary products, the implications are:

• The importance of clearly articulating how products mitigate financial risk in an uncertain economic environment.

• The importance of pricing discipline to balance affordability with the need to meet rising claims costs.

• Working closely with product providers to ensure products remain relevant at the point of sale.

As the market continues to evolve, businesses that adapt quickly to changing consumer needs and economic pressures will be best placed to succeed. In an environment defined by uncertainty, product relevance, value and customer confidence will become more important than ever.