The Used Car Price Index: A Checkup and Suggested Repairs

B. Peter Pashigian

Abstract

The Bureau of Labor Statistics (BLS) has published the used car price index since December 1952 as part of the Consumer Price Index (CPI). As its 48th birthday approaches, the used car price index merits a timely review for at least two reasons. First, compared to the new car price index, the used car price index is akin to an ignored stepchild, receiving less scrutiny but deserving of more attention. Second, there are nagging doubts and misgivings within the BLS about accuracy of the used car price index. The questionable behavior of the used car price index could be an undesirable byproduct of the sampling procedures adopted by the BLS. Or, could the source of the price information that the BLS relies on be the culprit? What role has the treatment of quality improvements played in explaining the suspect behavior of the used car price index? While any or all of these could be the underlying causes of the questionable behavior and should not be slighted, could the observed "excess" volatility of the used car price index be a real phenomenon? Used car markets might have less elastic supply curves and experience larger demand shocks compared to those observed in the new car and other durable good markets. This paper addresses these questions. Among the findings are

  • The failure to adjust used car prices for quality change between 1952 and 1987 helps explain why the used car price index rose more rapidly than the new car price index.
  • Used car prices are among the more volatile in the CPI. The source of the price data used by the BLS appears to contribute to the excess volatility of the used car price index.