Over the past year, car prices have risen dramatically. A lot of reporting on the subject centers on a semiconductor shortage as the primary cause. However, I will argue that rising wages at car dealerships as well as the rising costs of transportation are the real reason for more expensive cars.
Rising Car Prices:
The chart below shows both the used car price index from, divided by the overall CPI index which tracks overall price changes. It shows that prices in used cars have skyrocketed recently.
In addition to this, real new car prices, graphed below, have increased significantly for the April to June period of 2021. Overall, it’s price increase has not been as significant (or existent) as the used car price increase.
Despite the fact that the significant price increases have occurred for used cars, rather than new cars, the given explanation for the price increases is that a semiconductor shortage has created a supply bottleneck for car production.
Reporting Focuses on Semiconductors:
A lot of news reports on rising car costs attribute them to rising semiconductor costs. Semiconductors are necessary for computer chips. Cars use computer chips. So rising semiconductor costs should logically feed into rising car costs.
One can find articles attributing high car prices or a car shortage to a shortage or high prices in either semiconductor or computer chips from the following news sources: NBC, CBS, Slate, Yahoo, Forbes, The Guardian, Times, CNN and Fox.
Semiconductors Are Not The Cause of Rising Car Prices:
Inflation adjusted, the price of electronic components which go into car production (PPI commodity code: 1412-0514) has decreased recently. The chart below shows the price of electronic car parts against the CPI.
This is not surprising because inflation-adjusted electronic prices are declining overall as the chart below shows.
While there was a shortage of semiconductors at the beginning of the lockdown, causing semiconductors to decline in relative price less than normal; there isn’t any semiconductor shortage now.
The Real Causes of Rising Car Prices
Rising Car prices are largely supply-side. We know that because car production, graphed below, has declined after the pandemic. However, there could be some demand-side pressure on prices as well. This is because low interest rates at the moment make it cheaper to borrow money to buy a big ticket item (like a car) and pay it off over a few years. Nonetheless, the data shows that supply-side factors are dominating in terms of quantity.
However, a lot of the supply-side mechanisms at play are in terms of distribution. While consumer prices for new and used vehicles are going up, the price car factories will sell their product at is going down. This is shown in the chart below.
Two industries function as intermediaries between consumers of cars and car-producing factories. One is wholesale distribution and the other is car dealership. The chart below shows that the specific services both render have gotten more expensive in inflation-adjusted terms.
The chart above is based on government indexes of the expensiveness of particular industries. When the government creates an index to measure how expensive an industry is it makes certain assumptions in order to calculate the “real value” an industry produces. Those assumptions are based on the prices of specific categories of goods and services (like automobiles ready for wholesale distribution or automobiles ready for retail distribution) that existed at a certain chosen base period. Using the base year prices for the inputs and outputs of each industry, the government calculates the “real value” produced by each industry. It then looks at the value added by the industry according to the market which comes in the form of pre-tax income of workers in the industry and gross pre-tax corporate profits. As a result, the rising cost of wholesale distribution is not just because oil prices have gone up (while they have and that is perhaps another contributor to higher consumer costs of automobiles) but that actually the level of money going to workers and corporations in those industries is higher for the same amount of “real value” produced.
In the case of car and car parts dealerships, the rising costs of the industry may be partially understood in terms of rising labor costs of those industries. The chart below shows cpi-adjusted average wages and overall costs in the “motor vehicle and parts dealers” industry. Both series are indexed and set equal to 1 on January 2020. It seems that wages are rising along with, and may even be predicting, rising costs of the industry.
However, rising costs in wholesale distribution of durable goods is less explained by rising labor costs. The chart below shows cpi-adjusted average wages and overall costs in the “Merchant Wholesalers, Durable Goods” industry. Once again, the series are indexed to 1 at January 2020. In this case, wages have stayed constant while industry costs have risen.
I can’t explain why wholesale distribution of durable goods has become more expensive as an industry. Nonetheless, I am confident that it and higher wages for car and car parts dealership employees are the main reasons that American consumers are paying more money for cars.