Nhtsa: Ford Recalls Nearly 109000 Vehicles

Al Root

President Donald Trump says cars will get cheaper thanks to his rollback of Biden-era fuel-economy regulations. That might not be the case.

The president gathered auto executives in the Oval Office on Wednesday to announce that he is rescinding "horrible CAFE standards" that govern how cars' fuel efficiency in America. (CAFE stands for Corporate Average Fuel Economy.) He also linked fuel economy standards and the "green new scam" to soaring car prices.

Indeed, cars are more expensive than they used to be. At the end of 2019, the average transaction price of a new car was about $39,000, or about 57% of median household income. Now, it's about $50,000, or about 60% of the median household income. Comparing car prices to income can help contextualize how price changes impact families.

Furthermore, car transaction prices are up almost 30% since Covid-19, and auto insurance prices have soared 55%.

It is impossible to pin the rise on one factor. Nearly everything is more expensive today, including the labor to build cars. The consumer price index is up about 28% from prepandemic levels.

Environmental compliance is part of the overall cost equation. EVs, for instance, cost about $9,000 more, on average, than a gasoline-powered car. However, that burden is borne by EV buyers, who can receive government support for purchases.

Developing more fuel-efficient engines costs more. But car buyers also like filling up at the pump less. Forty-plus years ago, gasoline cost an average American up to 5% of their annual income. Now, gasoline is closer to 2% of an American's annual income.

Jessica Caldwell, head of insight at automotive data provider Edmunds, says that the administration's announcement "was presented as a way to ease pricing pressures for consumers, but meaningful financial relief is unlikely to happen overnight."

For starters, auto makers can't shift production or plans on a dime. They also have to plan ahead for any changes that might happen after the Trump administration, Caldwell says.

It might be safer to say that the rollback of fuel economy standards relieves one pressure valve on future car price increases.

The auto industry appears to agree. The CEOs of Ford Motor and Stellantis, present in Washington on Wednesday, praised Trump's decision as a win for common sense. The auto industry feared that the previous CAFE rules were unattainable, which could lead to a mix of earnings losses, higher prices, and lower overall car demand.

Cars aren't set to get less efficient under the Trump administration's proposed CAFE rules, either. The efficiency gains they are required to meet are getting smaller.

While calculating the exact savings to a car buyer of the new CAFE rules is impossible, a back-of-the-envelope estimate is possible and offers some guidance.

Take Tesla. It has generated roughly $10 billion in regulatory credit sales over the past five years, much of which was a function of California's air quality regulations that President Trump has also attacked. Those credits work out to roughly $400 to $500 per car sold in states that follow California's rules.

That is a very crude approximation of the cost of some modern compliance rules. And the rollback in fuel-efficiency standards might mean cars could be a little less expensive down the road.

Shares of traditional auto makers rose on Wednesday. Ford was flat, while General Motors was up 1%. The S&P 500 and Dow Jones Industrial Average were flat.

The impact of CAFE is one small part of evaluating the outlook for car makers. Interest rates, tariffs, and the health of the U.S. consumer ultimately matter more.

Write to Al Root at allen.root@dowjones.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.