Despite appearances to the contrary, the UK economy is not a picture of wholesale doom and gloom.

This week, the Office for National Statistics (ONS) announced that unemployment had fallen to its lowest level since 1974, while the number of job vacancies remains well above one million. Between June and August, average pay rose by 5.4pc.

Beyond the dry statistics, motoring magazine Autocar reports that car dealers are doing particularly well, “registering record profits per sale amid supply shortages”. Online car seller Carwow reinforced the evidence that car values have soared, announcing that the average used car will set you back around £17,000 – “an increase of about £4,000 on pre-pandemic levels”. The publication quoted instances of used cars being more expensive than their brand-new equivalent.

There are a number of reasons why average used car prices have witnessed a hike of more than 25pc over the past few years. The shortage of semiconductor chips is perhaps the most significant factor.

Almost all modern-day electronic gadgets, as well as cars, require a large (and expanding) number of chips. Skyworks Solutions, which produces wireless chips for a broad range of industries, forecasts that within two years nearly 75pc of all new cars will include cellular connectivity as a standard feature. Accountants Deloitte estimate the cost of the average car’s electronic components accounted for 18pc of the total in 2000. Two decades later, that had risen to 45pc and there’s every indication that this percentage (and associated costs) will continue to rise.

Computer chips have become integral to today’s cars. They are responsible for the delivery of in-car infotainment screens, as well as safety systems such as airbags and engine management controls. However, as car sales slumped during the pandemic, sales of electronic devices such as games consoles and mobile phones boomed. Accordingly, chips previously intended for use in cars were re-directed towards the manufacturers of these devices, leaving car producers to play catch-up when they could finally start selling again.

Shouldn’t the UK invest and start producing in-demand semiconductors for domestic use and export? Unfortunately, that ship sailed a long time ago. Remember David Cameron’s ‘Silicon Roundabout’? It’s been turned into an isolated layby occupied by a trailer serving all-day breakfasts.

Earlier this year, the Biden administration proposed an investment of $50 billion to develop America's chip-manufacturing sector, but even with such an enormous mountain of cash, chip shortages would almost certainly continue because the market remains dominated by Asian giants including Samsung and Taiwan’s TSMC.

“The shortage of semiconductor chips is important but is only one factor that has directly influenced the inexorable rise in car prices,” says Ken Carter of personal finance website Moneymapp. He highlights the unusual impact of pent-up demand which began during the first lockdown.

“When demand for any product increases steadily and eventually chases a limited supply, a situation which occurred in the second-hand car market pre- and post-lockdown, prices will invariably rise. Remember, many dealerships had closed their doors, unsure over whether they could trade normally without any restrictions.

“Granted, online buying and contactless deliveries eased some of the pressure on car sales, but not before sales plummeted. Essentially, buyers retained their cars for longer, with many people waiting until lockdown had finished before deciding upon their next purchase – which had become a more expensive one than many people imagined.”

A noticeable shift in demand for electric vehicles has applied additional price pressure across the new car market, encouraging buyers to re-visit second-hand dealers as the supply of new vehicles suffers. As a consequence, used car prices continue to increase, with little sign of an impending slowdown.

“Given a prevailing scenario where car-related prices are surging upwards, astute motorists will seek to save money wherever they can,” says Ken Carter. “One of the most effective means of doing this is to compare your car insurance costs. After all, who wouldn’t want to explore the possibility of saving more than £300 on their annual car insurance bill?”

Last month, motoring website reported that the average annual cost of fully comprehensive motor insurance had risen beyond £700 during the second quarter of 2022. Given the other costs piling up on motorists, exploring how this expense could be reduced makes a lot of sense.

For more financial advice, check out Peter Sharkey’s regular blog, The Week In Numbers.

This column is for general information only and cannot be relied on as financial advice for individuals. Consult your professional adviser.