Real Prices for New Cars Keep Going Down

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

Thanks to an anonymous comment for the link to this Dept. of Energy website with data on the Average Price of a New Car from 1970 to 2006, in both current and constant dollars. The chart above shows the real, inflation-adjusted average price of a new car from 1976 to 2006 (in constant 2006 dollars).

What's interesting is that the real price of a new car fell by 10% from 1998 ($25,186) to 2006 ($22,651), and decreased in 7 out those 8 years, or by a total of $2,535 during that period.

Note that this measure of retail car prices does NOT adjust for the continual quality improvements over time in new vehicles, while the CPI: New Cars measure does (see below).


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.