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2.77% Inflation: Car Prices

Summary

Since the year 2000 car prices have risen at an annual compounded rate of about 2.77%.

The BLS inflation figures have usually been below 2% for more than a decade.

Inflation of equity prices is far higher than 2.77%.

Inflation for new car prices has been fairly constant since 2000. The Debt Clock gives the average price of a new car in 2000 as $22,058 and at the beginning of 2020 as $38,046. Calculating a 2.77% interest rate compounded annually on a principal of $22,058, one has $38,097 after 20 years. This is an interesting statistic since almost everyone in the US needs a car and also has one. For workers, expenses for a car are one of the major expenses that they have to face.

BLS Inflation

What follows is a statement from the Bureau of Labor Statistics (BLS):

“U.S. Inflation Rate, $175,000 in 2000 to 2020

According to the Bureau of Labor Statistics consumer price index, today's prices in 2020 are 49.37% higher than average prices since 2000. The U.S. dollar experienced an average inflation rate of 2.03% per year during this period, meaning the real value of a dollar decreased.

In other words, $175,000 in 2000 is equivalent in purchasing power to about $261,390.24 in 2020, a difference of $86,390.24 over 20 years.

The 2000 inflation rate was 3.36%. The current inflation rate (2019 to 2020) is now 2.05%1. If this number holds, $175,000 today will be equivalent in buying power to $178,589.74 next year. The current inflation rate page gives more detail on the latest official inflation rates.

Inflation Rate between 2000-2020 | Inflation Calculator

Those investors looking to feast on statistics can examine in detail the BLS calculations on the BLS website at Calculators and see various charts dealing with inflation.

Reckoning that the BLS calculates that average inflation from 2000 to 2019 was 2.03%, then it is clear that car price inflation increased faster than the BLS CPE average.

The debt clock shows that the median income in 2000 was $30,425 and is now $33,365 while the median house price in 2000 was $161,159 and now is $313,896. What this means for wealth inequality was examined by John Mauldin in a Seeking Alpha article.

Equity Prices

A quick look at a chart of the S&P from 2000 to 2020 shows that equity prices far outpaced inflation as reported by the BLS.

S&P 500 Index

In 2000 the S&P was at 1,500 and went down to about 1,000 in 2009, but it recovered quickly and by 2020 at the present time is about 3,250. Since 2013 it has more than doubled. Even with the dotcom crisis and the GFC, equities have far outpaced the CPI. This short historical review should make it clear to investors that equities are highly priced relative to inflation.

Conclusion

One may well ask why one should consider all these figures concerning inflation. The answer is that investors can realize that equity prices have far outpaced the CPI and are rather expensive. Even so, if corporation buybacks continue despite declining profits and the Fed continues QE4 and injecting liquidity into the repo market, stock prices will probably continue increasing until they become so expensive that the risk of downturn and minimal ROI will drive investors back into fixed income securities. The outlook is therefore a bull market pushing the S&P to 3,500 or even a bit more followed by a severe downturn because corporations will have to curtail share buyback programs due to lower profits and tightening credit. In the meantime CPI inflation may increase significantly with a consequent reduction in consumption on the part of workers that are practically poorer than they were in 2000.

What the Fed will be able to do in an environment with increasing inflation is that it is unlikely to reduce rates further as that would fuel inflation. On the contrary, it is likely that the Fed will have to raise rates to fight inflation, and that would cause serious problems even if it continues to provide liquidity to the repo market. Though the Fed has indicated that support to the repo market will be reduced over the summer, what the Fed says it will do does not always coincide with what it does.

So investors should watch what happens with inflation rates. Staying long with equities is still paying off, but how much longer that is going to last is not certain.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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