Inflation, Technological Innovation, and the Prices of Automobiles

Why does the car you bought in 2012 cost more than the car you bought in 1960? The Chevrolet Impala was the best selling vehicle in the US in 1960 with a list price of $2,590. This compares to the Toyota Camry, the best selling car in 2012, which has a list price of $22,055. Why the difference of $19,286? Most of us instinctively answer "inflation", but it is also undeniable that today's car is safer, more reliable, more comfortable, and more efficient than that of 1960. How much of the price increase is due to technological improvements, and how much is due to pure monetary inflation? Let's try to answer that question. Just for the sake of a more fair comparison, we will use the specifications for the lowest 4-door trim levels for each vehicle. Let's compare them in the table below.

1960 Chevrolet Impala

list price: $2,590 engine: Inline 6-cylinder, 3.9 L horsepower: 135 hp transmission: 3-speed manual brakes: 4 drum brakes interior space: 136.3 cu. ft. (estimated) cargo space: 17.8 cu. ft. (estimated) fuel efficiency: 18/22 mpg (city/hwy) climate control: none (a $327.42 AC/Heater was available as an option) gross weight: 3625 lbs. length/width/height: 210.8/79.9/54 in. safety: 51 fatalities per billion miles traveled

2012 Toyota Camry

list price: $22,055 engine: Inline 4-cylinder, 2.5 L horsepower: 178 hp transmission: 6-speed automatic brakes: 4 disk brakes interior space: 118.1 cu. ft. cargo space: 15.4 cu. ft. fuel efficiency: 25/35 mpg (city/hwy) climate control: AC and Heater gross weight: 3190 lbs. length/width/height: 189.2/71.7/57.9 safety: 11 fatalities per billion miles traveled

So how much might we be willing to spend on the improvements between the 1960 Chevrolet Impala and the 2012 Toyota Camry? If a car like today's Toyota Camry was available in 1960, it would have sold for a higher price than the Impala, of course, but for how much more? Here we can't be absolutely certain, mostly because the range of options on which we can spend our money is very different in 2012 than it was in 1960, but we can estimate based on comparisons with similar vehicles then and now.

Another consideration we should make is to compare how the average hour of labor in the US translated into purchasing these vehicles, so we'll look at whether these vehicles have changed in price appreciable in comparison to the median hourly wage. The median hourly wage in 2011 was $16.57. The median hourly wage in 1960 was $2.47. These are both nominal values, meaning they have not been otherwise adjusted for inflation effects, which is what we want for this analysis. That means that we can re-cast our two competing car prices as 1,050 hours for the Impala and 1,330 hours for the Camry. That gives us a difference of 280 hours of increased labor required to afford the 2012 Camry over the 1960 Impala.

Power

One of the easiest things to compare is the horsepower (or acceleration potential) of the two vehicles' engines. The Camry's engine has 43 more available horsepower than the Impala, although this isn't quite the whole story as the Impala weighs 435 lbs (198 kg) more. So, the Impala would need more than 43 additional horsepower to equal the acceleration and overall handling of the Camry. The next higher engine option, a V-8 with 185 horsepower added an additional $107 (43 hours' wages) to the list price of the Impala. I doubt the additional 50 horsepower is really sufficient to close the acceleration gap with the Camry, but for now, it is close enough.

Comfort

Here we have the strongest direct metric of our comparison. In 1960, an Air Conditioner and Heater combination was available as an option on the Impala for a price of $327 (or 132 hours' wages). This isn't the whole story, as seats have been designed to be more ergonomic, window defrosters reduce the work required to drive in cold weather, and power locks and windows make life easier, if only marginally. A kit to replace power window and lock actuators in a vehicle similar to the Impala will cost about $200 in 2012 (or 12 hours' wages). This would be equivalent to about $30 in 1960. In truth, small electric actuators would have been much more expensive in 1960, since their ubiquity has more to do with modern automated manufacturing techniques, but I doubt 1960's consumers would have put much more of their own labor towards something of relatively minor importance like these.

Radio and MP3 player systems were not available in 1960, and neither was Bluetooth for cell phone connectivity, although those are common in 2012. With a price for a Mp3 stereo system being about $60, and the cost of an automobile Bluetooth adapter being about $30 in 2012, we can estimate these options to be worth about 5 hours wages in 2012 terms or approximately $13 in 1960.

Safety

For the safety ratings I listed above, I used the risk of fatality per billion miles driven for the years 1960 and 2010. Since these cars are more or less representative of the average vehicle on the road in their own time frames, I think this is fair. All of this data comes from NHTSA which you can see here.

But, it is not just the number of deaths per mile traveled that concerns us, but also our overall risk of dying. In other words, have we compensated for the lower per mile risk by driving many more miles ever year such that our overall risk remains the same as in 1960? The short answer is "No". While each vehicle drives on average about twice as many miles in 2012 than the average vehicle did in 1960, that is not sufficient to make up for the nearly 5-fold difference in road fatalities during that time.

The risk of dying during an average annual driving distance (i.e. 7,000 miles in 1960) in the Impala is 0.035%, while the risk of dying in one year in the safer Camry is estimated to be about 0.007%. Pre-1980 estimates of the value of a statistical life (see this article for more information), range from $1.0 million up to $9.2 million. Depending then on the driver's own estimate of their risks and value of their own life, a car purchaser should be willing to pay between $280 and $2,520 for the additional safety provided by the Camry. We will use the lower value for our argument's sake.

This isn't the whole story on safety, of course. Improved visibility, especially at night, is a feature of the Camry compared to the Impala. Seat belts were not required in cars until 1961 (they were an option on the Impala in 1960), and were only available as lap belts at the time. Additionally, stability and traction control, which are automated systems that reduce the chance of a total loss of control, are not possible without the computers that control modern cars. All of these systems reduce not just the risk of fatality, but also the risk of damage to the vehicle as well as minor injuries from other avoided less catastrophic crashes.

Disk brakes were available as an option on other vehicles in 1960, and power brakes were also. Although, I could not find any information on the list prices of these options, I did find the results of a study in 1983, which listed the automaker's cost of these options as being $38 [15 hours' wages], which we can take as roughly equivalent to the list price in 1960 (as well as the considering the cost of other improvements such as anti-lock brakes).

Improved road design, as well as regulation and enforcement on things like driving while intoxicated have also improved safety, although it is difficult to parse out the relative contributions of improved crash survivability due to improved vehicle design, and other factors.

Fuel Consumption

The Impala has an efficiency of about 20 mpg combined city/highway, while the Camry gets a better rating at around 30 mpg combined. There are a couple different ways we could handle this one. One is to assume that both vehicles will be driven the same amount of miles per year. In 2012, that value was 13,400 miles, but in 1960, the number of miles driven per vehicle per year was about 7,000 or about half. Using the nominal price of gas in 1960 ($0.31 per gallon) and a vehicle efficiency of 20 mpg, we would see an annual gasoline expenditure of between $109 and $208 or between 44 and 84 hours of labor. The improvement gained in 1960, by having a car that did all the same things, but could travel 30 mpg, would be to reduce gasoline expenditures to between $72 and $138 or 29 and 56 hours of labor. So, for this capability, a logical consumer planning to drive this car for 3 years would be willing to spend at least $111 and possibly as much as $210 depending on how much they planned to drive. We'll use the lower value in our calculation below.

Externalities

There are a few externalities we should contemplate including pollution and traffic. There aren't direct costs on the consumer of owning the vehicle, but rather they are costs to the consumer and others of other people owning the same kinds of vehicles. But, since we can't purchase a car without also expecting others to purchase cars as well, they do need to be included at least in a qualitative sense, even if we don't directly add them to the price of the vehicle directly.

In 1960, air quality in cities like Los Angeles, Chicago, and New York was terrible compared to what it was in 2012. While CO2 emissions have continued to increase since the 60's, other more immediately dangerous pollutants have declined significantly. This is mostly due to the Clean Air Act, which mandated pollution control equipment to be installed on automobiles and power plants. The benefits of cleaner air improve life for car consumers in cities, but they do add cost due to the required catalytic converters and other systems. We are not accounting for this cost or benefit in this article.

In 1960, traffic congestion was much lower than in 2012, with the average commuter in a large city losing about 30 hours per year in traffic jams. The same commuter in 1960 lost less than 10 hours by comparison.

Credit

This is sort of a tangential issue to the purpose of this article, but it bears mentioning. Credit is much more available in 2012 as compared to 1960, and a greater percentage of car purchases are financed with credit to a greater degree than they were five decades ago. This increases aggregate demand, as people can purchase a nicer vehicle with the same amount of money up front, or with lower monthly payments required over the term of the loan. Whether consumers are putting this additional purchasing power into the price they are willing to pay for their automobile, or whether they would use that purchasing power on something else entirely is outside the bounds of this limited analysis.

Final Tally

Now, let's account for the differences we've identified, and see where we are left in our comparison between the Impala and the Camry.

Price of 1960 Chevrolet Impala With 2012 Camry Features Additional Horsepower (+$107) [43 hours wages] Air Conditioning and Heater (+$327) [132 hours wages] Power Locks and Windows (+$30) [12 hours wages]] Power Disk Brakes (+$38) [15 hours wages] Mp3 Stereo System and Bluetooth Adapter (+$13) [5 hours wages] Fuel Consumption (+$111) [45 hours wages] Overall Safety (+$280) [113 hours wages]

So, the price of a Camry-like Impala in 1960 would have been about $3,496, or about 1,415 hours at the prevailing median wage. This isn't definitive, of course, since it neglects reliability, insurance, and many other less tangible features that nevertheless affect our decision about which vehicle to buy (although except for tail fin fans, most of those factors would cause this price differential to increase and not decrease), but it is the start of such a comprehensive comparison.

The Camry-like Impala in 1960 would have required at least 85 more hours of labor to purchase than today's Camry requires with today's labor (probably more given our conservative estimates). This could be due to more efficient factories being able to produce these vehicles with less overall labor than was required five decades ago.

Automobile Prices and the Consumer Price Index (CPI)

How have the prices of automobiles been affected by general inflation and technological improvements? Based on our calculation of a price on a Camry-like vehicle in 1960, we can see that car prices have still increased by $18,559 or 631% between 1960 and 2012. According to the CPI, $1 in 1960 is equivalent to $7.76 in 2012, an increase of 776%. In other words, according to the CPI, the price of our Camry-like Impala in 2012 dollars should be $27,129, rather than the $22,055 price of the actual Camry.

There are a couple ways to interpret this information. One is that the Camry and similar cars today are actually cheaper than comparable cars would have been in 1960. In other words, the price of automobiles has deflated to some degree not unlike what happens to the prices of computers, Mp3 players, televisions, and other electronics. Second, alternatively, one might say that the CPI is in error, and the correct rate of inflation between 1960 and 2012 would be something closer to 631% than 776%, although further analysis would be required to justify that proposition.