Two years of precipitous production declines, along with the shift in consumer tastes in car design, raised many problems for the domestic car industry. The industry found itself largely unable to sell its gas-guzzling large cars, which were its most profitable. Consumers, faced with rapidly increasing car and fuel prices, were demanding smaller, more economical cars that offered better mileage than the gas guzzlers of old. This placed Detroit in direct competition with Japanese carmakers, which were technologically more advanced and more efficient than U.S. manufacturers.
Unable to introduce immediately vehicles which had been radically redesigned to meet the desires of consumers, in 1977 U.S. carmakers instead downsized current models. The strategy worked in 1977, with production increasing almost 9 percent over depressed 1976 levels. By the late 1970s production was less a concern than inflation, costs, and quality control. Automobile production was basically flat from 1977 to 1978. The inflation rate, however, rose from 7 percent in May 1978 to 11.3 percent in July 1979, a rise which was the product of both inflationary pressures still rampant in the economy and new tensions in the Middle East.