Bigger, safer, better: tracking retail and quality adjusted new car prices in the CPI

Introduction

This article looks at the price movements of new cars over a 10-year period from 2001 to 2011. The movements of car prices, as measured by the consumers price index (CPI), should reflect changes in price, but not the effect of changes in the features of cars. To remove any changes in quality, the retail prices we collect from car dealers are ‘quality adjusted’, based on the value of the changed features to consumers.

Over time, the difference between the quality adjusted prices and retail prices tends to increase, due to new features being added when new car models are updated. Across this 10-year period, the retail prices of makes and models of new cars tracked in the CPI increased 19.1 percent. The quality adjusted prices were relatively flat, decreasing 1.5 percent over the 10 years.

Car prices in the CPI

The CPI measures the rate of price change of a range of goods and services purchased by households. The 710 goods and services that are sampled in the CPI are known as the CPI basket – car prices were added to the basket in 1955. We collect prices of new cars, for a variety of makes and models, from dealers in all 15 CPI pricing centres around New Zealand, which range in size from Timaru and Wanganui to Auckland.

Every three years, as part of scheduled CPI reviews, we formally review the makes and models of new cars tracked in the CPI. The review takes into account engine size, market segment, body type and size of vehicle, and the country of origin. We aim to keep the sample of cars being tracked as representative as possible of household spending. To do this, we use information on the number of new cars registered for private use by individuals, disaggregated by make and model.

Quality adjustments

Change in the quality of a product or service should not be reflected in the price changes shown in the CPI. When car models are updated, the features they include may change; when this occurs we consider it a change in the quality of the car. Occasionally, a model of car becomes unavailable between reviews, and a substitute is selected – another way that the quality of the car changes. So that the CPI measures only ‘pure’ price change, we use quality adjusted prices in the CPI, to remove the effect of changes in features.

When distributors report changes to the models being sampled, we ask for the ‘perceived’ value of these changes to customers, in dollars. To ensure the adjustments are consistent, we check them against records of previous adjustments. When there are changes to the engine, Statistics NZ estimates the quality change, based on maximum power and torque. The values of all changes between the two models are combined – in practice, this sometimes means an improvement and a removal of a feature cancel each other out. The retail price of the car’s updated model is then reduced (or increased) by the total value of the features that have been added (or removed), to give its quality adjusted price.

Most quality adjustments to new cars are made to remove the effect of improved or additional features, which increases the quality of the vehicle. In these cases, the value of the changes is removed from the retail price of the updated model to generate the quality adjusted price. Some quality adjustments result from small changes, such as extra remote keys, or additional, steering-wheel-based stereo controls.  Other adjustments tend to be the result of single, high-value improvements such as installing airbags or engine changes. Large quality adjustments generally result from many such changes occurring at once.

If the quality adjustment is made to remove the effect of a decrease in quality, the value of the changes is added to the retail price of the updated model. In the 10 years from 2001 to 2011, most adjustments in this direction resulted from reductions in engine power or torque. Another reduction in quality occurred when the rear seats in one model changed from folding to fixed, which reduced the flexibility of the storage areas. In another example, the storage area volume was reduced, resulting in a decrease in quality.

For more information on the data sources and methods used to compile the CPI new cars index and to adjust for quality change, see How new car price changes are measured in the CPI.

Time series comparisons

Figure 1 shows two price index time series for new cars, based on the retail prices of the models tracked for the CPI and on quality adjusted prices (as used in the CPI), as well as the all-groups CPI. The retail price series increased 19.1 percent over the 10-year period, while the quality adjusted price series decreased 1.5 percent.

The retail prices showed an annual average increase of 1.8 percent, although for the years to June 2005 and 2008, retail prices fell. The average decrease of the quality adjusted prices was 0.2 percent a year. Overall, new car prices moved less than the CPI, which increased 32.1 percent over the 10 years, giving an average of 2.8 percent each year.

Figure 1
Graph, New car retail price index - June 2001 - 2011 quarter.

When each quality adjustment is made, the difference between the retail price index and quality adjusted price index tends to increase. As the majority of quality adjustments have been due to increases in the quality of the sampled cars, the quality adjusted series tracks below the retail price series.

At the June 2011 quarter, the index based on retail prices was 20.9 percent higher than the index based on quality adjusted prices. This implies that the 2011 models tracked in the CPI were of 20.9 percent higher quality than those tracked in 2001. This equates to an annual average increase in quality of 1.9 percent.

Around half the new cars that New Zealand imports come from Japan, so the exchange rate between the two countries is one factor in determining new car prices. The New Zealand dollar to yen exchange rate from the June 2001 quarter to the June 2011 quarter is shown in figure 2.

Between the June 2001 quarter and the June 2007 quarter, the New Zealand dollar appreciated an average of 9.9 percent each year against the Japanese yen. During the six years, retail prices for new cars were quite flat, increasing an average of 0.9 percent per year. Quality adjusted prices, which track lower than the retail prices, were decreasing at this time by an annual average of 1.3 percent.

The New Zealand dollar depreciated against the yen by a total of 34.4 percent between the June 2007 quarter and the June 2009 quarter. During this time, new car prices increased an average of 3.9 percent a year for retail prices, and 2.3 percent for quality adjusted prices. Both prices and the exchange rate levelled off in 2010.

Figure 2

Graph, Exchange rate - New Zealand dollar to Japanese Yen - June 2001 - 2011 quarter.

Based on engine size, each car model in the CPI basket is categorised as small, medium, or large. We can combine retail price movements for the three size groups in a similar fashion to the overall car price index, as shown in figure 3. The price indexes for large cars, based on both retail prices and quality adjusted prices, tracked lower than the other two size groups when prices increased in 2009. Large cars tend to be imported from Australia and Europe rather than Japan and appear to have been less affected by the New Zealand dollar depreciating against the Japanese yen.

Figure 3

Graph, New car retail price index - June 2001 - 2011 quarter.

Specific models we tracked

We can illustrate the impact of quality change on car prices by looking at two specific models tracked in the CPI.

Large sedan

First, we look at a large sedan that was tracked for the entire 10 years from the June 2001 quarter to the June 2011 quarter. Over this time, the retail price increased from $49,700 to $54,100 (up 8.8 percent). This was the weakest retail price increase of the models that were tracked for the entire 10-year period.

The quality adjusted price decreased from $49,700 in 2001 to $49,200 in 2011, an overall decrease of 1.0 percent.

The difference between the retail and quality adjusted price series generally (but not always) increased over time, as successive quality adjustments were made. The difference at the June 2011 quarter was $4,900, which is 9.0 percent of the final retail price. We can also say that the 2011 model was of 9.9 percent higher quality than the 2001 model, giving an annual average quality improvement of 0.9 percent.

During the 10-year period we made quality adjustments to this price series for a variety of feature changes including:

  • the engine increased in power and torque, despite a 5 percent reduction in engine size
  • the transmission changed from four gears to six gears, and then to five gears
  • side-curtain airbags were added
  • the CD player went from single disc to a six-disc changer
  • independent rear suspension was improved
  • bigger wheels were added
  • auto headlights were added.

Image, Large sedan.

Hatchback

Next, we look at a hatchback that was tracked for the entire 10 years from the June 2001 quarter to the June 2011 quarter. The retail price increased from $29,500 in 2001 to $36,000 in 2011, an overall increase of 22.0 percent. Of the models tracked for the entire 10-year period, this model showed the largest increase in retail price.

The quality adjusted price decreased from $29,500 in 2001 to $28,900 in 2011, an overall decrease of 2.0 percent. At the June 2011 quarter, the difference between the quality adjusted and retail prices was $7,100, or 19.7 percent of the final retail price. Expressed another way, the 2011 model was of 24.5 percent higher quality than the 2001 model, meaning quality increased an average 2.2 percent a year.

During the 10-year period, we made quality adjustments to this price series for a variety of feature changes including:

  • the engine size increased from 1.6 litres to 1.8 litres
  • the transmission changed from a five-gear manual to a four-gear automatic
  • a CD stereo replaced a cassette stereo and four more speakers were included, taking the total to six
  • the car now comes with an extra remote key and power windows
  • traction control and rear disk brakes became standard
  • airbags were upgraded from being only on the driver’s side to being a full package of front, side, curtain, and driver’s knee
  • tilt steering and driver’s seat height adjustment were added
  • tyres became wider
  • luggage capacity decreased.

The retail price of the hatchback was $36,000 in 2011. Between 2001 and 2011 the quality adjusted price of the hatchback decreased 2.0 percent (which is quite close to the overall quality adjusted price decrease for new cars of 1.5 percent). This means that the price of a car that is of equivalent quality to the 2011 hatchback would have been about $36,700 in 2001. In 2001, $36,700 would have bought a 2.2 litre automatic sedan of the same make.

Image, Hatchback.

Conclusion

The retail price of new cars tracked for the CPI increased 19.1 percent over the 10-year period from the June 2001 quarter to the June 2011 quarter. This price increase was smaller than the overall rate of increase in the all-groups CPI, which rose 32.1 percent. After quality adjustments were made for the CPI, new car prices fell for much of the period and by 2011 were 1.5 percent lower than in 2001.

Over the 10-year period examined here, the difference between quality adjusted prices and the actual retail prices implies that the quality of new cars tracked in the CPI improved by 20.9 percent – an annual average quality improvement of 1.9 percent. By adjusting for these quality improvements, the CPI reflects only the estimated pure price changes of new cars.

Back to Price Index News: October 2011