CPI overstated for cars?
A 40 page PDF from the Fed says the CPI has been way overstated for cars because of incentives and quality improvements. (cars make up 8% of the CPI).
Conclusion
In this paper we use a rich data set of monthly sales, transaction prices, and financing terms to document several empirical observations on prices for motor vehicles. First, we show that financing incentives play an integral role in understanding recent movements in aggregate vehicle prices. We also find that multiple vintages of the same models are often sold simultaneously in retail vehicle markets, a practice that presents challenges as well as opportunities for measuring vehicle purchase prices. We examine within-model-year price movements and find that vehicle prices drop rapidly in the months after their introduction, often in large part through the use of direct manufacturer-to-consumer incentives. Finally, we consider the construction of a price index that uses matched-model techniques to aggregate over model years.
The results of using a conventional index number approach to measure vehicle prices depend crucially on which vehicles can and cannot be considered similar across model years.
Our preferred approach, which regards major redesigns and new trims as new (or separate) goods, yields a price index for consumer vehicles that drops faster than the decline shown by the CPI for the same period. We attribute this result to two developments—both relatively recent—that we believe are incorporated more accurately in the price measure constructed using our data and our approach. First, the rate at which manufacturers introduced new and modified models increased dramatically beginning in 2000, and the CPI may have been slow to adapt to the change, in effect treating many of the popular, expanded trim options as price increases. Second, the value and incidence of interest subvention increased noticeably in late 2001 and in 2002 and likely is not fully reflected in the CPI. All told, we find that the pace of quality improvement in consumer vehicles averaged 6 percent per year from 1999 to 2003, a pace twice that implied by official estimates.
federalreserve.gov |
