This is part 3 of my series about inflation. And this will wrap up my discussion of the subject for the rest of 2021 (with any luck). Here I’m concerned with inflation’s big driver: transportation.[1]
In my previous post, I included this graph:
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That big line way up at the top is transportation. But be sure to notice that from March, 2020 through February 2021 prices in this category were falling. Only in March 2021 did prices begin to rise. A lot. The reasons are easy to understand.
The transportation component of the CPI includes various sectors: new cars, used cars, airfares, “other intercity transportation,” gasoline, maintenance and repairs, parts, insurance, and a few others.
Before delving into the graphs, it’s important to understand a basic distinction. Cars and other vehicles are durable. A car (hopefully) lasts for several years. Used cars and new cars are substitutes. But there is another substitute for buying a car. You can just fix up your old car and keep in going for another season or two. That makes the demand for cars, new and used, much more sensitive to fluctuations in income than some other products.
But regardless of which car you drive, you still have consumables: gasoline, parts, repairs, insurance, and so on. These depend on how much you drive, not whether your car is new, used, or already owned.
Finally, there is another category of transportation that is mainly services. Airlines and other forms of public transportation are good examples. The demand for services tends to also be very sensitive to income. Consider, for example, business and tourism travel. It’s not much fun but a vacation can be postponed. And it turns out that teleconferencing is a pretty good substitute for a good deal of business travel.
So let’s look at the consumables and public transportation first.
Consumables: Gas, Other Fuels, Insurance, and More
Gasoline and other fuels are not very storable. The supply chain needs to keep draining wholesale storage tanks to fill those at fueling stations. Therefore, price tends to fluctuate with demand. Sure enough, motor vehicle fuel prices fell during 2020 and are rising in 2021.
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Car insurance premiums are usually related to costs. The market is regulated in many states. I know we got several refund checks on our car insurance. People were driving less. Fewer miles driven mean fewer chances for accidents.
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Auto repairs and parts, on the other hand, are not as sensitive to demand fluctuations. Parts can be kept in inventory for extended periods. An auto shop can lay off mechanics and avoid cutting prices. As expected, these sectors are less sensitive to demand.
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Services: Airline Fares, Other Intercity Transportation, Public Transportation
Airline fares and ticket prices for trains and buses are also very sensitive to demand. While airlines can (and do) cancel flights or eliminate routes, there are significant costs in the form of changing reservation systems, repricing the tickets, and similar activities. To avoid those costs, transportation companies will adjust prices as much as possible.
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Cars, Used and New
Here are the relevant graphs.
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Prices fell slightly during 2020. In the used car market, this was caused by car rental companies liquidating their fleets. Even today, the price of renting cars is very high. But prices have increased for new cars in 2021 as those same companies begin to rebuild their fleets. Note that late in 2021 prices increased at a slower rate after rising by 40% in June 2020. New car prices increased at a slower rate, currently 10%. This is a normal pattern in an economy recovering from a recession. But the size of the price increases is much larger than normal.
Conclusion
Much of the inflation in transportation is caused by normal cyclical factors. The size of the price increases in 2021 are larger than normal in part because of the previous decreases in prices. In the car market, a major contributing factor is government spending. The federal government has been spending like a drunken sailor on shore leave. Inevitably, a lot of that spending will be on durable goods. Cars are very durable. It would not surprise me to learn that state and local governments were using some federal COVID funds to refurbish and/or enlarge their auto fleets. Anyone for new police cars?
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