Cars, Inflation, and the Quantity Theory of Money

You have probably seen the latest inflation data. The headline number is 5.4% increase in prices in the past year as measured by the CPI-U. That’s a lot! Even the Core CPI (removing volatile food and energy) is up 4.5%.

If you follow the data closely, you may also have heard that a big chunk of that increase comes from prices related to automobiles: new cars, used cars, rental cars, car parts. All way up!

If you are in the market to buy a car, or if you really need a rental, it’s a bad time for prices. (Conversely, if you have an extra car sitting around, it’s a great time to sell!)

But what if you aren’t in the market for a car? What does the inflation data look like? The White House CEA tweeted out this chart to deconstruct the factors in the recent CPI release.

What does it all mean?

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Chip Shortages Shutting Down Auto Assembly Lines; Buy Your Car Now Or Else

Global supply chains and just in time inventory work great – – until they don’t. Every car these days is a rolling computer, with semiconductors in every vehicle. No chips, no cars. For various reasons, there is a big worldwide shortfall in the chips needed for cars and trucks, which is causing auto assembly lines to shut down for extended periods. Car prices are already rising in response.

Chip production as a whole was slowed down this past year because of Covid effects at the factories. More importantly, chip production was switched away from automobiles to lighter consumer products. Auto assembly lines were curtailed due to the virus, resulting in reduced demand for those specific chips in 2020. The thinking among chip makers was that in the midst of a deadly pandemic, consumers would be sitting home ordering goodies from Amazon or Alibaba, rather than cruising car dealers or spending on travel. Indeed, U. S. spending on durable goods exploded in 2020, fueled in part by generous unemployment and stimulus payments, and this has soaked up existing chip production.

However, car buying has come back earlier than expected. Chip manufacturing is a lengthy process, taking some 26 weeks from start to finish. Chip makers are scrambling to add new capacity and to reconfigure their manufacturing lines for autos, but this shortage will not resolve until later in the year.

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