Consumers Benefit from Car Competition

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 |  Includes: F, GM, HMC, TM
by: Mark J. Perry

One of the most under-appreciated, unreported and unrecognized facts about the automobile industry is captured in the chart above (click to enlarge), showing the Consumer Price Index (CPI) for All Items from the BLS (data), vs. the CPI for New Cars (data) from 1998-2008 (both set to equal 100 in January of 1998).

Notice that since 1998, consumer prices have increased by 34%, an annual rate of 2.7% for consumer prices on average. However, new car prices have FALLEN by about 4% over the last 11 years, meaning that new cars are much more affordable today than in 1998. If new car prices had increased at the same rate as the average product in the CPI (adjusted for quality), new car prices today would be 38% higher than they are today! Keep in mind that wages and income have increased at a rate equal to, or higher than, the CPI, meaning that cars are about 38% MORE AFFORDABLE today (adjusted for quality), relative to income and average prices, THAN IN 1998!

Despite the financial troubles for the UAW and the Big Three, American consumers have benefited tremendously from the intense foreign competition in the auto industry. Except for electronic goods, what other consumer products are actually cheaper today than in 1998? Not too many.

Bottom Line: Competition in the auto industry (or any industry) breeds competence, to the great benefit of the U.S. consumer in the form of lower prices and higher quality. Without the significant discipline of foreign competition, we'd probably be paying a lot more for new cars today, with significantly fewer improvements in quality.