Earlier today in discussing auto prices I’m afraid I did not explain myself very well.
Let me use actual data and see if I can do better.
Because the CPI is quality adjusted what it is showing is the price of buying an earlier model car, if you could. In the chart above I set the base at 1975 so the CPI is saying that from 1974 to 2007 the price of buying a 1974 car rose from 100 in 1974 to 216.2 in 2007, or 116%.
Over this time the average transaction price for a new car rose from $4,859 in 1975 to $23,336.
This is a 371% increase — the index rose from 100 to 471. I could not quickly find the data to update the suggested retail price data.
The difference between a 116% price increase and the 371% increase is what you actually have to spend to buy a new car. By using the CPI data Carpe Diem was implying that the average consumer was getting a real raise because the CPI data shows that auto and light truck quality adjusted prices fell in the 1990s. To a certain extent this is true. But in other ways it is not true
because the consumer is unable to buy an earlier model car. What the consumer has to buy is the car that is offered in the market place today and the actual price the consumer faces is the average transaction price. Part of the differences is what the consumer has to buy in the market place that is not counted in the CPI as a quality improvement. For example the standard radio in an auto use to be a simple AM radio. Now it is a AM-FM radio. Another example is that today’s autos are much more durable. A quarter century ago about the only car on the market that was still in very good shape after 100,000 miles was a Volvo. But it was an expensive car.
Now, essentially every car can reasonably be expected to still be a good car after 100,000 miles.
But this change is quality is not incorporated into the CPI quality adjustment.
The Carpe Diem argument that because the CPI for new cars had fallen over the past decade the consumer has gotten a real raise is only partially true because the consumer can not go into the market place and buy the earlier model car. What consumers have to actually spend is the average transaction price whether they want to or not. So going back to the data on the chart above, the average sum the average consumer spent on a new car rose 371%, but out of this increase some 116% represented quality improvements, so the real price increase was 155%.
I’m still afraid I made the correct point here, but maybe the discussion can clear it up.
P.S. In rethinking this the difference between the 116% in the CPI for autos and 371% increase in the average transaction price is how much of a quality improvement in cars the BLS estimates happened. The BLS says the average 2007 car is 255% better in quality than the 1975 car.