Sunday, June 15, 2008

The Real Cost of New Cars is Falling 2% Per Year

In the face of all of the bad news about rising gas prices, here's maybe some good news: The real cost of new cars is actually declining.

Here's why: In the last 30 years since 1978, consumer prices on average (CPI: All Items) have increased by about 3X (see chart above). During that same period, the CPI for Gasoline Prices has increased almost 6X, meaning that the real cost of gasoline has risen. But the CPI for New Cars has only gone up by less than 2X, meaning that the real cost of new cars has been falling, offsetting some of the sting of higher gas prices for consumers.

On an average annual compounded basis, consumer prices have increased annually at a 4.1% rate since 1978 (see chart above), while gas prices have increased by 6%, meaning that the real cost of gasoline has been rising by 2% per year on average over the last 30 years. But the cost of new cars has increased by only 2% annually, suggesting that car prices adjusted for inflation have been falling on average by 2% each year since 1978!

Another way to look at it: If new car prices had risen at the same rate as inflation since 1978, new cars would be more than 50% higher than today's prices. And if new cars had increased annually at the same rate as gasoline prices, they be more than 3X higher than current car prices! If the real price of gas is rising, but the real cost of new cars is falling, is it possible that the overall cost of owning and operating a car might not be changing that much?

Update: IRS guidelines allow 50.5 cents per mile deduction for vehicle expenses in 2008. At 12,000 miles per year, 25 mpg and $4 gasoline, that works out to about 16 cents per mile in fuel costs, leaving 34.5 cents for non-fuel related expenses. In percentage terms, that's 32% for gasoline and 68% for non-fuel expenses, including the cost of the vehicle, financing, depreciation, etc.


At 6/15/2008 7:55 AM, Anonymous Anonymous said...

Car manufacturers are transfering revenue to parts. This is a marketing trick and the real reason behind the fall mentioned.

I will give you an example: A certain car manufacturer that uses extensively "planned absolesence" of parts has designed the window rolling switches so that after a certain number of uses they break and cannot be replaced. You only have the choice to replace the whole control unit of windows, mirrors and central locking for over $600. That amounts to more than 3% of the cost of the particular car for just one part and it WILL happen to you after the guaranty exprires.

There are numerous other examples. A new car if kept over the typical 2 year manufacturer standard guaranty, it may cost up to 100% in the next 4 years to maintain.

So, the straw man of falling car cost is just that, an artificial image.

At 6/15/2008 9:13 AM, Anonymous Anonymous said...

Are you not conflating the quality adjusted CPI car price index with retail sticker prices.

According to the US Department of Energy, the average price of a new car rose from $6379 in 1978 to $22651 in 2006. If that data is accurate then new car prices haven risen at the same rate as the CPI:All Items index.

The consumer might be getting more bang for their buck when purchasing a new car today compared to 30 years ago, but the new car buck has risen at the same rate as headline CPI.

At 9/18/2008 4:38 AM, Anonymous Anonymous said...

As a regular individual, those decrease of cost of cars in the percentage is not really that significant. With the increasing fuel prices, comfort and luxury ain't really whats in the minds of this consumers. But the practicality of the product. I heard that because of this, there has been a rise in sale of bikes and other means of transportation


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