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Home Publications Blogs Beat the Press USA Today Tells Readers that Used Car Prices are at Record Highs

USA Today Tells Readers that Used Car Prices are at Record Highs

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Tuesday, 10 May 2011 05:12

This assertion is strange for two reasons. First, since prices generally rise through time (we have modest rates of inflation, not deflation), most prices will be at record highs most of the time. In other words, it is likely that the price of tables, hair cuts, bread and most other goods and services are at or near record highs.

The other reason why the assertion is strange is that it does not appear to be true. The Bureau of Labor Statistics (BLS) price index for used cars actually shows that they are lower, in nominal terms, than they had been in the late 90s (the graph shows nominal prices).

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It is possible that the measures followed by USA Today do not track the BLS data closely because BLS makes quality adjustments in comparing prices. For example, if a car comes with a better braking system or sound system than the prior year's model, this will be factored into the price. A straight price comparison of the newer car with the older car may show a price increase, but when a value is assigned to these improved features, it may turn out that the price has remained the same or even fallen.

Comments (11)Add Comment
Speaking of Mendacious
written by Ron Alley, May 10, 2011 6:33
Dean,

Your defense of BLS quality adjustments puzzles me. The BLS quality adjustments make little sense and seem to me to be methodology contrived by BLS to understate inflation. This seems especially true with respect to cars new and used. The number of car manufacturers is small. The manufacturers tend to copy each other in the features incorporated into the cars they manufacture, especially those features deemed necessary to attract customers. Just as price inflation is built into manufactured products, quality improvement is also built in. Twenty years ago, a car buyer could expect to get 50,000 trouble free miles from a new car. Today's buyer can expect to get over 100,000.

What percentage of cars manufactured and sold in 2009 did not have anti-lock brakes, or side air bags, or a "trim package" upgrade? I don't have a ready answer but my gut reaction is that that percentage is darned small.

So, how hard does a used car buyer have to look to find a 2009 BLS baseline car? Is such a used car even available?

A price index should compare how much a buyer in today's market would have to pay for goods or services as compared to yesteryear's market. Today's buyer of manufactured goods probably cannot find goods identical to those sold in yesteryear. So the BLS effort to "adjust" for year to year improvement in the quality is truly mendacious.




To/From
written by PeakVT, May 10, 2011 6:46
Improved features are nice, but a car's basic purpose is still getting to and from work. Everything that doesn't affect operating costs (sound system, moonroof, etc.) should be ignored by the BLS.
Lemon Cars Outed Due to Free Market Efficiency
written by izzatzo, May 10, 2011 7:00
The Bureau of Labor Statistics (BLS) price index for used cars actually shows that they are lower, in nominal terms, than they had been in the late 90s (this is in nominal terms).


This is due to an efficient market that has eliminated the famous 'lemon car' effect from the past demonstrated by economist George Akerlof.

After Obama kicked off the Competition Revival, consumer choice once again reigned to break past the transparency barrier and allow lemon cars to be weeded out by astute buyers of used cars who now know as much as those who sell them.

The resulting competition for the consumer dollar was so fierce it drove down used car prices.
BLS Quality Adjustments
written by Dean, May 10, 2011 7:24
Ron,

I have been around the block on BLS quality adjustments. Back in the mid-90s I was arguing against all the top experts in this area who claimed that quality adjustments for cars and other products were inadequate, which meant that the CPI overstated inflation.

The reason they argued for an overstatement of inflation was that this was to be an excuse to cut Social Security benefits. The Senate Finance Committee appointed a commission headed by Michael Boskin, the chief economist to Bush I, which claimed that the CPI overstated the annual inflation rate by 1.1 percentage point and advocated reducing the annual cost of living adjustment for SS by this amount.

After spending a great of time investigating their procedures, I came to the conclusion that on average BLS's adjustments are about right. There are certainly places where they likely did under-adjust and therefore overstate inflation, but also places where they over-adjust and therefore understate the true rate of inflation.

I think cars may fall into the latter category for reasons that would take a while to explain. However, we are most likely talking 0.1 -0.3 pp a year, not multiple percentage points. You'd have to beat up the data pretty bad to get a very different picture of car prices than what the BLS data indicate.
Budget Problems vs BLS Price Index
written by Tom L, May 10, 2011 7:33
If a family needs a used car, then the family must purchase a used car as it exists today at current quality standards. Static to falling family incomes make that purchase more difficult if the price of a car increases, even if that car is higher quality. Thus, consumers have a budget problem, even if they don't have a price problem.
...
written by Ron Alley, May 10, 2011 12:41
Dean,

Thanks for the response. I haven't studied the methodology and data as you have. That said, I still find that even though the official inflation rate is rather small, I find that the things I buy frequently seem to cost more every year. That is why I believe that the official rate understates inflation.
NPR Had the Same Story
written by Stuart Levine, May 10, 2011 3:43
NPR's Morning Edition had the same story this morning: http://n.pr/jqjMf2
Your argument is a wreck
written by scottindallas, May 11, 2011 8:23
Cars, especially used cars are very inflated. Consider that car production has fallen over the last few years, thanks to the financial problems over the last few years. Production was cut and much used car inventory has been eliminated.

You never mentioned cash for clunkers, which basically made every car a $3000 minimum value. Gas prices have also affected prices as SUV's have fallen in demand with the soaring prices. So, if you're buying counter-cyclically here you could find some value.

However, considering supply of used cars is suppressed on two ends, less production AND literal destruction of supply; considering the falling credit rating of many buyers, demand for lower value cars has increased. All these factors have caused used car prices to soar over the last decade. Over this time, there is nominal improvements in quality. Much of those "quality improvements" might be skewed too, in that they were perhaps accounted for in higher prices that were off-set by heavy dealer discounts. Suburbans were regularly selling with $5000 off. This was an incentive to dispose of some "upside down" debt on trade ins. But, is an accounting gimmick that would skew your figures.

You love to make snide remarks about those who were too dense to see the housing bubble. You're too dense to even call a used car dealer, or get ANY independent info. Be careful, the Blue Book invents their numbers.

You might contact Ed Wallace who saw the housing bubble, the oil speculation we see today and in '08, he's a real reporter who focuses on automotive, manufacturing and related themes. He writes for Businessweek and our own Fort Worth Star Telegram in addition to hosting a 5 hour radio show on Saturdays "Wheels" and offering a fine website, www.insideautomotive.com You can contact Ed through the website, by your rubric, he saw the housing bubble, as well as the commodities bubbles, before you did. But, he follows the numbers and avoids the bubble (Wall St/Washington.)
BLS is more trustworthy than used car dealers
written by Dean, May 11, 2011 12:33
scottindallas,

I do have a lot of faith in BLS. They spend a lot of time putting together their data series -- they contact many used car dealers. Until someone gives me a good story on why their data is wrong, I am inclined to accept it.
And little green men manipulating the numbers does not cut it.
Dr. Baker, dilligence on your part is overdue
written by scottindallas, May 14, 2011 8:28
The AP and Wall St. Journal have stories on the inflation of used cars. Dr. Baker, I've been more right on here than you repeatedly. And, I'm just a dumb landscaper with a philosophy degree. But, I have access to real economic information, not the bias built figures that penetrate the federal bubble. I'm in the McClatchey world, you're WaPo.

Seriously e-mail Ed Wallace, please. You're way wrong on this. Trade ins are up, values are 20% up. Ed is discussing this on the radio right now, he's listed 5-6 stories just this week, figures upon figures of record inflation of car prices. The guy's whole niche is this very point. But, I'm sure you're cursory reading is superior.

Ed has won Gerald R Loeb award for broadcasting as well as others many others.
used car dealers
written by scottindallas, May 14, 2011 9:10
Ed ran some of the finest dealerships in Dallas/Ft. Worth. He has many dealers who advertise on his show. He's discussed the differences between the various "used car dealer books" one thing he points out is that the dealers are sent forms to fill out regarding their car sales. He claims that very often the dealers made up those figures. There is no money in it for them, no h/t, nothing, and that's what they put into it. Many of those forms come back incomplete if returned at all. I'm not ideologically opposed to you, Dr. Baker--except that I think you've failed to make the clear case that higher taxes drives desirable behavior from those under the dangling sword of Damacles (tax rates) High tax rates ARE THE DISCOUNT TAX RATES for investment and hiring. You may not collect more revenue, but you do get desirable behavior. I AM self employed entrepreneur, and find it funny that so many "professionals" want to tell me about the free market--a rumour to them. We entrepreneurs aren't affected by taxes, we are the most nimble actors in the market--save the financiers. The only difference, every program intends to discount our business activities--the financiers have to disguise their activities to fit "capital investment" loophole. Contact Ed, Dr. Baker.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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