Automotive Prices Lead Core Producer Price Index Higher

During June, headline producer prices surged 1.8%. Excluding the typically volatile food and energy components, the producer price index rose at a tamer, but still brisk 0.5%. Leading this rise was a climb in producer prices for light trucks and passenger cars.

The Bureau of Labor Statistics explained:

The index for finished goods other than foods and energy increased 0.5 percent in June after inching down 0.1 percent in May. Accounting for most of this upturn, prices for light motor trucks climbed 3.4 percent following no change in the previous month, and the index for passenger cars rose 2.0 percent in June after edging up 0.1 percent in May.

At this time, it remains to be seen if a trend in which new vehicle production costs rise faster than core producer prices becomes established. The fact that monthly producer prices for passenger cars have increased faster than core producer prices for 5 of the last 7 months and producer prices for light trucks have exceeded the change in core producer prices in 6 of the last 7 months is a worrisome indicator. A six-month moving average for the core producer price index and the two new vehicle components also indicates that costs in the automotive sector may be starting to rise faster than overall producer prices.



A trend in which automotive producer prices rise persistently faster than the core producer price index could indicate that the restructuring of the automotive industry, including the bankruptcies of Chrysler and General Motors, is slow in increasing competitiveness even as the debt burdens of Chrysler and General Motors have been pared substantially.

Should the automotive sector grow less cost-competitive in its production costs, the automotive sector could be confronted with the challenge of trying to pass on its higher costs to consumers or continuing to face financial pressure. Already, the six-month moving average of new vehicle prices indicates that new vehicle prices are rising faster than either headline or core consumer prices.



Although it is too soon to determine whether that trend will be sustained, much less fully diagnose its causes, at least three factors could be contributing to the possible emergence of an unfavorable trend in new vehicle prices.

• Automobile manufacturers are trying to “catch up” with the recent increase in their production costs relative to producer prices. In doing so, they are trying to pass on at least a share of those costs to consumers.

• Automobile manufacturers have assumed that demand for new vehicles will increase as an economic recovery takes hold. Under such a scenario, they figure that there might be an opportunity to pass on at least some share of the recent increase in their production costs that would not exist were the economy to continue to contract.

• Moral hazard is beginning to play out. Given the enormous taxpayer assistance that has been provided to the automotive industry and to automotive parts suppliers, the industry believes that additional downside risks from a stagnating of new vehicle sales or even a further decline are relatively minimal. Instead, the federal government would be prepared to render additional assistance under such a scenario. Under such a risk assessment, the automotive producers could assume that they can take a greater risk at increasing their prices in the face of soft economic conditions that they might otherwise have had to forego in the absence of expected additional federal assistance.

Overall, a situation in which the automotive industry’s production costs rise relative to the core producer price index could have profound consequences for the troubled U.S. automobile industry. In a market in which competition is global, more cost-competitive foreign producers could gain additional market share. That development could weaken recovery prospects for the U.S. automobile industry. It could also inhibit the domestic industry’s ability to invest in research and development relative to their international competitors, potentially creating an environment of further decline relative to global producers. It could render the U.S. automotive industry less capable of addressing potential future challenges brought on by the emergence of disruptive technologies that could dramatically alter the industry landscape in terms of such variables as cost, design, and fuel consumption.

&&