Monday, March 30, 2009

The Real Price of New Cars Has Fallen


In all of the discussions on the U.S. auto industry, GM, Ford, and Chrysler, etc., we shouldn't forget about the biggest beneficiaries of the intense global competition in the car industry: American consumers. The top chart above shows the CPI for new cars, which increased annually between 1973 and 1996 at the compounded rate of about 4% before leveling off and falling at a rate of -.50% per year for the last 12 years.

The bottom chart shows the CPI for All Items (4.6% annual inflation rate) vs. the CPI for New Cars (2.6% annual inflation). Since 1973, the CPI has increased by 5 times, compared to only a 2.5 increase in the CPI for new cars. If new cars had increased at the same rate as the CPI for all goods and services, new cars would be twice as expensive today (adjusted for quality). American car consumers have never had it so good - new cars are better and cheaper than at any time in history.


15 Comments:

At 3/30/2009 8:08 PM, Anonymous Anonymous said...

We rented a Chrysler Sebring last week for spring break in Phoenix. American cars have come a long way, as we felt the quality of the vehicle was every bit as good as the Toyotas that we own at home. With 38,000 miles on the Chrysler, it felt great to drive and the interior and exterior were great.

I just wonder how much of the vehicle is USA made vs. our Toyotas, which are made in the USA.

Still, nice to see USA automakers improving their quality.

 
At 3/30/2009 8:51 PM, Anonymous Ralph Short said...

In 1965 I paid $1,200 for a 65 chev (4 door chevelle) and earned at the time $7,000 a year.

In 1972 I paid $1,500 for a 72 chev (2 door chevelle) and was earning $8,000 a year.

In 1979 I paid $5,000 for a 79 chev (4 door station wagon) and was earning $16,000 a year.

In 1985 I paid $9,000 for an 85 cavalier (4 door sedan) and was earning $40,000 a year

In 1987 I paid $10,000 for an 87 cavalier (4 door sedan and I still had the 85) and was earning $48,000 a year.

In 2006 I paid $30,000 for an 06 Impala SS and was earning $90,000 a year.

So, while the last year looks as though it cost me more as a percent it was just something that I had to have because the 95 SS I bought used was such a great car. Therefore I spent some savings on a muscle car.

It's a guy thing no matter how old you are.

 
At 3/30/2009 9:16 PM, Blogger PeakTrader said...

I stated before, U.S. automakers have been at a competitive disadvantage, because of perceived lower quality (although, Buick, a GM auto, is currently ranked #1 in quality, and it's the top selling foreign auto in China), and production costs are higher, e.g. labor costs (including pensions and health care). Also, U.S. automakers offered zero percent financing, rebates, no payments for six months, etc. to increase production. So, unlike many foreign automakers, U.S. auto producers have been squeezed by lower prices and higher costs, which benefited U.S. consumers enormously, and workers, at the expense of profits.

 
At 3/31/2009 2:48 AM, Blogger sethstorm said...

Better and cheaper are at odds with each other with respect to quality.

 
At 3/31/2009 9:44 AM, Blogger misterjosh said...

sethstorm - that's a valid statement, and I think NASA can attest to it. During their better/faster/cheaper initiative in the 90s & early 2000s they had a lot of failures.

 
At 3/31/2009 3:23 PM, Blogger spencer said...

Not Quite.

I've been over this before with you.

What the chart of the CPI for autos shows is what it would cost today to buy a car with the characteristics of a 1973 car, not what it would cost to buy a car with the characteristics of a new model car.

The CPI adjust for the quality changes to new cars every year so what it assumes away the quality improves.

Moreover, it does not measure what a consumer actually pays for a new car. What the consumer actually pays for a new car is the average transaction price that includes the actual costs of the quality improvements.

Since 1973 the CPI shows that the price of a quality adjusted car has increased at a 2.5% average rate. That is what a 1973 type car would cost today. But the average transaction price, or the actual price consumers had to pay rose at a 4.5% annual rate or virtually the same as the overall CPI.

Go here to see my comments when you did this before:
http://angrybear.blogspot.com/2008/07/auto-prices-and-cpi.html

To find the actual transaction price do this:
(3) Instructions for access to BEA data:

1. Go to BEA's website: www.bea.gov;
2. Click on 'Gross Domestic Product' (under the National section)
3. Scroll down to the bottom of the page to 'Supplemental estimates'
4 Click on 'Underlying detail tables' (1st item)
5. Click on 'List of Underlying Detail Tables'
6. Click on '7 - Motor vehicle output'
7. Click on 'Table 7.2.5S'
8. Scroll down to line 37 which begins the average expenditure per car section.

 
At 3/31/2009 4:36 PM, Blogger ExtremeHobo said...

Spencer - So thus even if we use the results that you have found to best fit your ideas then the result is still less than the 4.6% for all items?

 
At 3/31/2009 5:20 PM, Blogger spencer said...

Extreme hobo-- don't confuse you with the facts.

What I said is not fit my biases, it what the data actually shows.


do you have any evidence=e to demonstrate that what I said was wrong.

For that matter does our good host know enough to show that I'm wrong.

 
At 3/31/2009 7:09 PM, Blogger PeakTrader said...

Spencer, I think, the data show autos have become more affordable, and quality improvements are grossly understated.

I'm sure you've seen many children of poor Third World immigrants, who would have earned $3 a day in their home countries, driving around in high quality autos here in the U.S.

 
At 4/01/2009 9:01 AM, Blogger spencer said...

Of course, that is why the average length of auto loans has grown from three years in 1975 to over 5 years now.

 
At 4/01/2009 4:27 PM, Anonymous DrTorch said...

Spencer,

Seems to me another way of looking at this would be, what would a 2009 car cost you in 1975?

You mention the improvements in quality, and components (AM radio vs AM/FM stereo). But also consider there are additonal features now, such as ABS, air bags, remote keyless entry, CD player. Those would cost a fortune in 1975, and it's fair to include that in the economic equation.

 
At 4/01/2009 5:44 PM, Blogger OBloodyHell said...

> Better and cheaper are at odds with each other with respect to quality.

Which is why competition solves the quandary best, by letting the consumer choose the weighting.

Some manufacturers go for quality. Hence Lexus.

Other manufacturers go for price. Hence Daewoo.

Some cheap it down, but chrome it up. Hence Scion.

And then the consumer chooses how best to use their money.

Wonderful thing, this "competition".

 
At 4/01/2009 6:16 PM, Blogger OBloodyHell said...

> Of course, that is why the average length of auto loans has grown from three years in 1975 to over 5 years now.

Not at all. Most people, being economically less illiterate than ideal, choose lower payments for longer. This is the same sort of yutz who chooses to lease vehicles, which is nothing but an extended rental system.

 
At 4/02/2009 8:58 AM, Blogger ExtremeHobo said...

First off, Spencer completely dodged my question.

Second off, I thought that this posting on CD proved your conclusions wrong.

Third off, Come on! Who wouldnt rather have a new 1973 Dodge Charger than the stuff that passes for American Muscle these days? I guarantee that 35 years from now a 2008 dodge charger has depreciated in value as apposed to appreciated such as the 73 model. Back then cars were art (and made of solid effing steel!), where is that in your value equations spencer?

 
At 4/02/2009 9:34 AM, Blogger spencer said...

It is not my value equation.

It is what the facts are.

The CPI is a measure of what it would cost now to buy a car with the
characteristics of a 1975 model.

It is not what our good host claims it to be.

That is a statement of fact.

Aren't any of you intelligent enough to understand this.

2 + 2 does = 4 even if you elect not to believe it.

 

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