rising costs

Several economic factors are driving higher costs of many goods and services, including equipment leases. Staying informed about key elements contributing to rising prices and what’s to come can help businesses plan for the year ahead.

Critical drivers of cost changes include:

Inflation: Inflation, which decreases the purchasing power of money, has increased significantly. On average, prices have increased about 25% over the past six years, according to the U.S. Bureau of Labor Statistics (BLS) Consumer Price Index (CPI) Inflation Calculator.

The overall consumer price index has increased 3.1% over the past year, BLS reported in its latest CPI report. Unfortunately, transportation and maintenance costs have risen even higher than costs in other industries. The transportation services CPI increased 10.1% year-over-year, while the maintenance and repair CPI grew 8.5%.

OEM Vehicle Costs: Transportation costs are directly affected by the cost of equipment, which is increasing as original equipment manufacturers (OEMs) deal with new regulatory requirements, supply chain challenges, and higher component, freight and labor costs. The costs of 2025 model-year equipment, for example, are up significantly over 2018, with the average OEM vehicle price up 23%.

Increased Maintenance and Labor Costs: Service vendor and dealer prices have also increased as locations address higher costs for parts, tires and outside repairs. There is a severe technician shortage in the industry, and costs associated with attracting, hiring and retaining technicians have also increased. As a result, costs associated with maintenance are up 20% to 30%.

Interest Rates: Federal policy has dramatically increased the cost of funds to try to slow inflation. The Federal Reserve has raised interest rates 11 times since early 2022. It did not raise rates in December, but in a press conference following the meeting, Jerome Powell, U.S. central bank chief, said that “inflation is still too high, ongoing progress in bringing it down is not assured, and the path forward is uncertain.”

The overall cost to finance equipment has increased since 2018. Due to higher upfront vehicle costs, leases are experiencing a rate increase of 30% to 35%.

The Road to 2027

Costs may continue to increase, especially with upcoming regulatory requirements that will tighten emissions. Stricter standards required by the Environmental Protection Agency and the California Air Resources Board will take effect in some states by 2025 and nationally in 2027.

“The regulations are out there pushing to make diesel engines much cleaner, but also likely more expensive and more complicated,” said Erik Neandross, CEO of Gladstein Neandross & Associates, while unveiling The State of Sustainable Fleets 2023 report, which was sponsored by Penske.

“What we found when doing the research for this year’s report, the price tag on these rules could easily add $30,000 to the cost of a new diesel tractor,” Neandross said. “That doesn’t include all of the ongoing maintenance that will be required by the fleet once these ultra-sophisticated aftertreatments are out in the field.”

Plus, OEMs must provide extended warranties, up to 600,000 miles, adding costs that will be passed along to the customer.

ACT Research forecasts medium- and heavy-duty vehicle costs will rise by 12% to 14% as the EPA’s Clean Trucks regulation goes live in 2027. “As such, we believe the OEMs will be at least partially successful in convincing customers to begin EPA ’27 pre-buying in 2024,” said Kenny Vieth, ACT’s president and senior analyst.

There are also several unknowns that come with new equipment technology, including the impact on maintenance and fuel economy.

Given the potential cost increases and uncertainty that lie ahead, including how a pre-buy could affect the industry, it can make sense for fleets to replace vehicles now and establish a regular replacement cycle.