Why does inflation go down but car insurance gets more expensive?
1:04
(CNN) --
After years of parts shortages, the average price paid for a new car in the United States recently dipped back below the manufacturer's suggested price.
But this doesn't take into account a bigger problem: Even before the pandemic, MSRPs kept rising as buyers became spoiled for choice.
Two decades of historical data from the automobile website Edmunds.com indicates that options are the main driver of vehicle price increases, and that this has been the case for many years.
"Overall, the average price difference between base models and vehicles with more customer choices has skyrocketed, from 24.6% in 2002 to 38.1% in 2022."
The median MSRP of a new, as-purchased vehicle was about $30,000 in 2009 and hit nearly $40,000 in 2019, before COVID-19 hampered parts supply and vehicle production. according to Edmunds.
Last year that number reached nearly $46,000, according to data from Edmunds.com.
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However, the inflation-adjusted average price of base models has actually gone down quite a bit, even as consumers shifted from sedans to more expensive wagons.
The difference is the cost of the options that buyers have added.
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Steve Reed, an economist with the Bureau of Labor Statistics, a government agency that measures inflation, agreed with Edmunds' historical price data.
"By our measurements, the real cost of cars relative to other things has gone down," he said.
That's good news for no-frills drivers: If you don't want to pay a lot for a new car, you don't have to.
If one doesn't dig into the options list, the cars are relatively cheap.
The basic is not so much anymore
Consider the Nissan Versa, the cheapest car available for the 2023 model year.
Its starting price is US$ 15,730.
Adjusted for inflation, it's barely different from the starting price of a Hyundai Accent in 2002, the cheapest new car available that year.
This is despite the fact that the 2023 Versa is loaded with standard features, including push-button start, blind spot monitoring, and a touchscreen, many of which weren't even available two decades ago.
The cheapest 2023 model you can buy, the Nissan Versa offers features that didn't even exist twenty years ago.
(Courtesy: Nissan)
According to data from Edmunds.com, the gap between the lowest starting price and average retail price for many types of vehicles has increased over the past two decades.
On the Mercedes E-Class, for example, the difference between the base MSRP and the average price with options was just 11.5% in 2002, up from 30% in 2022;
in the Chevrolet Tahoe, it went from 14% to 41% in the same period;
and in the Acura MDX, from 7% to 21%.
Taken together, the average price difference between base models and optional vehicles increased from 24.6% in 2002 to 38.1% in 2022.
Of course, it's not entirely surprising that base vehicle prices haven't gone up in the past two decades, adjusted for inflation, since that's what "inflation-adjusted" is supposed to mean.
For economists who calculate inflation, new cars are part of it, since they take into account a certain improvement in quality.
Competition is also a factor.
Car companies have found ways to keep prices low, even adding more safety tech and comfort features like automatic transmissions as standard.
These entry-level models may not make much money, if any, for manufacturers.
But they can attract buyers who can then be sold to more expensive versions in what is known as a "loss-leading" pricing strategy, said Michael Brisson, Moody's director of economic strategy.
And customers are more than willing to play along, says Matt Jones, a spokesman for auto pricing website TrueCar, who has worked in dealerships for 12 years.
"The idea that people buy the most affordable? I've hardly ever seen that happen," he said.
Up to you
So while car buyers are getting more for their money to begin with, Americans are still piling up options.
This year, GMC began offering its most luxurious trim level, Denal Ultimate, on its heavy trucks.
(Courtesy: General Motors)
In the case of General Motors' GMC brand, for example, the gap between base models and the average vehicle with options (as sold to customers) has grown steadily between trucks and SUVs in recent years. 20 years.
Surprisingly, the gap has grown fastest in GMC's heavy trucks, normally considered work vehicles.
The average price of a GMC Sierra 2500 HD, as sold, is now twice the starting price.
These customers see their big trucks as a reward for years of hard work, said Patrick Finnegan, GMC's chief marketing officer.
"You might think that a heavy-truck customer isn't in the market for this kind of thing, that they're not willing to pay for it," Finnegan said.
"But it's some of those features that they're really excited about, like the Bose Premium Series speakers."
According to Justin Wolfers, an economist at the University of Michigan, offering increasingly luxurious option packages is one way for automakers to take advantage of the widening income disparity in the United States.
Wealthy shoppers can pay more, while manufacturers maintain buying opportunities for those who don't have as much to spend.
pressure to improve
Edmunds.com's Drury explains that this increased choice is due to another type of competitive pressure: competition with friends and neighbors who have the latest features on their cars.
Also, when buying a new vehicle, people rarely want less than what they had before.
It also influences the strategy of the sector.
Car buyers rarely get to choose options individually.
Tyson Jominy, an industry analyst for JD Power, explains that to get the features they want, they often have to buy feature packs or even pay more for more luxurious "trim levels."
"A classic example is the 'Wheels and Tunes' pack," Jominy wrote in an email.
"There's no inherent link between the music and the wheels, but if you're an audiophile you have to get the upgraded wheels to get the name brand radio, and vice versa."
Jeff Bartlett, editor-in-chief of Consumer Reports, says car buyers can avoid getting caught up in the maelstrom that pushes them toward increasingly expensive new vehicles.
He worries that car buyers who see these rising prices for the "average new car" will use that as a guide for what their next car should cost.
"It gives me chills to think of people in this economic climate, thinking, 'Oh, well, I was going to buy a $30,000 car, but, well, I guess $50,000 is average, so why not? ?", said.
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