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Consumer Price Index
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Quality Adjustment in the CPI: New, Used, and Leased Motor Vehicles
Item definition
The new, leased, and used motor vehicles indexes cover all classes of consumer vehicles including subcompact cars, compact or sporty cars, intermediate cars, full sized cars, luxury or status cars, pickup trucks, vans, and specialty vehicles, including sport/cross utility vehicles. Vehicle classifications from Environmental Protection Agency (EPA) are used to assign each unique vehicle as either a car or a truck.
In this factsheet, we examine the cost-based dollar amounts used in the quality adjustment of price data for new, used, and leased motor vehicles.
Data sources
The new vehicles and leased cars and trucks indexes are estimated using a transactions dataset that includes observed transaction-level prices and detailed vehicle information. Each observation includes a transaction price as well as a set of 40 variables including rebate values and vehicle characteristics. The majority of nameplates purchased or leased across the country are represented in the dataset. All transactions reported in the dataset are used in the new vehicles and leased cars and trucks indexes except for vehicles specifically referenced as fleet vehicles, police vehicles, work trucks, or cargo vehicles.
The used cars and trucks index uses estimated vehicle values that represent the prices of each used car and truck in the sample for monthly price comparison. The used cars and trucks sample is comprised of used vehicles that are between two and seven years of age. Adjustments for depreciation are applied to both the valuations obtained in the current month and valuations obtained in the previous month before estimating the monthly price change. The depreciation adjustment accounts for the reduced value that accrues throughout the duration of a year.
Current quality adjustment method
To maintain a constant quality index, quality adjustments are applied during model year changeovers using data received from automobile manufacturers. Quality adjustments are based on costs provided by manufacturers in categories such as reliability, durability, safety, fuel economy, maneuverability, speed, acceleration/deceleration, carrying capacity, and comfort or convenience. Adjustments are also made when equipment is added or deleted from the tracked model.
Criteria for quality adjustments
Adjustments are made for structural and engineering quality changes such as:
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Changes that affect the safety of occupants of the vehicle as mandated by legislated federal or state standards. Changes in safety features not required by legislated standards will be evaluated on a case-by-case basis.
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Changes in mechanical or electrical features that affect the overall operation or efficiency of the vehicle, or the ability of a component to perform its function, such as changes affecting steering, braking, stability, engine horsepower, traction control, transmission, battery life, and fuel systems and/or electrical systems.
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Changes in design or materials that affect the length of service, durability, need for repairs, or strength or performance of the item, such as stronger bumpers, HID headlamps, flexible body panels, platinum-tipped spark plugs, or warranty changes.
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Changes that affect comfort or convenience, if supported by evidence of functional or software improvement, such as redesigned seat belts, remote door locks, theft deterrent systems, navigation and communication systems, satellite radio hardware, drive assist systems, backup cameras, sensors, or changes in storage capacity.
Adjustments are not made for cosmetic modifications such as:
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Style or changes in appearance designed solely to make the product seem new or different, such as trim, wheel design, colored bumpers, etc.
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Physical changes in separate components or parts that do not affect functionality or the performance of the component, such as simplification of components for assembly purposes or serviceability.
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Complete remodels, which are treated as new items in the index.
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Changes made solely to meet air pollution standards on models introduced in January 1999 or later and that do not otherwise provide direct value to the consumer. Price increases associated with such modifications are treated as increases in the index.
The important difference between this cost-based quality adjustment method versus a hedonic quality adjustment method is the use of actual cost data provided directly from manufacturers, which are not estimated costs derived from a regression model.
All quality adjustments are applied to the prior year’s vehicle price.
Cost-based quality adjustment example
The following example is provided to illustrate how cost-based quality adjustments are applied during model year changeovers for a new vehicle.
In the instance provided below, a 2020 model is undergoing a model changeover. The 2021 model has three characteristics/improvements that were not available in the 2020 model. To keep the quality constant in the new vehicles index, a cost-based quality adjustment will be applied to the price of the 2020 model before calculating the price change between the two models.
| Type of Change | 2020 Model | 2021 Model | Reported Value of Characteristic |
|---|---|---|---|
|
Retail Price |
$33,550 | $34,750 | -- |
|
Base Price |
$31,250 | $32,150 | -- |
|
Interior |
Not standard | Smartphone integration | $50 |
|
Transmission |
6 speed transmission (standard) | 9 speed transmission | $399 |
|
Remote/ keyless entry |
No | Yes (Auto Start/Stop) | $459 |
For a new vehicle, the adjustment amount includes the markup value, which is a ratio of the retail price and the base price of the younger vehicle.
Adjustments are calculated as:
Example
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Calculate the adjusted price of the 2020 model, which will be used to calculate the price change used in the index. Using the formula above,
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Calculate the price change of the adjusted old price and the vehicles item’s price. The adjusted price change is calculated as:
Measuring price change with cost-based quality adjustments is considered more accurate than directly comparing the prices. If the CPI did not use this method the price change in this example would be:
The same adjustment amount (QA *markup value) is also applied to the same vehicle models in the leased cars and trucks and used cars and trucks samples. This adjustment amount is applied to the prior year’s vehicle price, just as it is for new vehicles.
For leased cars and trucks, the adjustment amount is also applied to the residual value, which is the depreciated value of the vehicle at the end of the lease.
For used cars and trucks, these improvements are assumed to have depreciated at the same rate as the vehicle itself, and therefore, the adjustment amount is also appropriately depreciated.
Last Modified Date: May 12, 2025