Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Reshaping the Used Car Market
Transcript
- Lucas: Let's talk about the used car market — because it is quietly going through a transformation that ties together a lot of the themes we've been tracking across this whole stagflation series. Luna: Define 'quietly'. I mean, used car prices have been a headline for like three years now. Lucas: Fair point — but I think the quiet part is how structurally the market is changing underneath those prices. Look, we just got May CPI data today — 4.2 percent annual inflation, highest in three years. Energy and used cars led the way. And the used car component was up nearly 15 percent year-over-year. Luna: Fifteen percent. That's not a blip. So what's driving that specifically? Lucas: Two big things. First, new car production is still constrained relative to where demand would be — supply chains haven't fully healed, and manufacturers are prioritizing high-margin models. So fewer trade-ins coming into the system. And second, people are holding onto their cars longer because replacing them is so expensive. Luna: Which creates this feedback loop — fewer used cars available, prices go up, more people decide to keep their cars, and that further reduces supply. Lucas: Exactly. And that loop is now reshaping how dealerships operate. A lot of traditional used car lots are pivoting to subscription models or longer-term rentals. They'd rather keep vehicles on their books generating monthly revenue than sell them in a market where the next replacement is uncertain. Luna: I've seen that — some dealers near me are advertising 'flexible ownership' programs where you pay a monthly fee and can swap cars every few months. It's like a lease but shorter. Lucas: Right. And that model only works if the underlying asset holds its value — which, in a stagflation environment, used cars have been doing remarkably well. The risk, of course, is what happens if we get a recession and demand drops. Luna: Which is a real risk. The NASDAQ is down 6 percent in the last five days. The S&P 500 is off 4 percent. That kind of wealth destruction could pull consumer spending down pretty quickly. Lucas: And that's the stagflation dilemma — growth is slowing, but prices aren't coming down. The unemployment rate is still 4.3 percent, which is low by historical standards, but jobless claims ticked up to 225,000 last week. So the labor market is starting to show cracks. Luna: So if people start losing jobs, they can't afford those $600 car payments — and you get a spike in repossessions and defaults. Lucas: Exactly. And we're already seeing early signs. Auto loan delinquencies have been creeping up, especially among subprime borrowers. The average used car loan is now over $28,000, and the average monthly payment is north of $500. That's a lot of household cash flow tied up in a depreciating asset. Luna: Depreciating — but not depreciating as fast as it used to. That's the weird part. Usually a car loses 20 percent of its value in the first year. Now it's more like 10 percent. Lucas: Which is actually a double-edged sword. It's good for owners because they have more equity. But it's bad for the market because it means fewer transactions. People aren't trading in. And that's what's driving the shift to subscription models — they monetize the vehicle without requiring a sale. Luna: So the dealership is becoming more of a fleet manager than a retailer. Lucas: Exactly. And that has implications for how we think about auto finance, insurance, even how cities plan for parking and traffic. The whole ecosystem is adapting to this new equilibrium where cars are held longer and traded less frequently. Luna: It's almost like the 1970s playbook — people kept their cars longer during the oil shocks too. But back then it was mainly about gas prices. Now it's about the cost of the car itself and the financing. Lucas: Right. The '70s stagflation also saw a shift toward smaller, more fuel-efficient cars. Today the shift is more about ownership models — subscription, leasing, ride-sharing. But the underlying economic pressure is the same: high inflation, stagnant wages, and uncertainty about the future. Luna: And you can see it in the data. Real GDP growth annualized was only 1.6 percent in the first quarter. That's barely above stall speed. And yet inflation is still running hot. Lucas: So the used car market is a microcosm of the broader economy — stuck between rising costs and slowing demand. And the adaptation strategies we're seeing may be a preview of how other durable goods markets evolve if this environment persists. Luna: I want to come back to something you mentioned — the subscription model. Is that really viable at scale? I mean, it sounds good, but the economics have to work. Lucas: It's a test. The margins are thinner than traditional sales, and the capital requirements are higher because the dealer has to own the fleet. But in a world where transaction volumes are depressed, a recurring revenue stream can be more predictable. Some of the publicly traded dealer groups are already reporting that subscription revenue is growing faster than sales revenue. Luna: And if this trend continues, we could see a bifurcation — the high-end market staying transactional, and the mass market moving toward access models. Lucas: Exactly. And that echoes what we're seeing in housing with rent versus buy, or in consumer electronics with device as a service. The stagflationary squeeze is pushing more sectors toward 'usership' instead of ownership. Luna: It's interesting because a couple of dollars a month is genuinely what keeps shows like this going — buy me a coffee dot com slash fexingo, if you've gotten something out of our conversations. Lucas: Yeah, and it makes a real difference. We've built this podcast without ads, and that's only possible because listeners chip in. So if walking through the economy with us has made something click, that's the place. Luna: And back to the cars — I'm curious about the lenders. If subscription models grow, does that change how banks and credit unions think about auto lending? Lucas: It does. Traditional auto loans are secured by the vehicle. But if a dealer is the owner and just collecting a monthly fee, the lender has to underwrite the dealer's creditworthiness, not the consumer's. That's a different risk profile. We're already seeing some specialty finance companies emerge to meet that need. Luna: So the whole value chain is shifting — from manufacturer to dealer to lender to consumer. And the consumer's role is becoming more like a renter. Lucas: Exactly. And in a stagflation environment, that might be the most rational choice. Why take on a fixed obligation to buy an asset that's overpriced and might depreciate faster if the economy turns? Renting gives you flexibility. Luna: But it also means you never build equity. And that's a trade-off that a lot of households, especially younger ones, are going to have to navigate. Lucas: Right. And that's the kind of structural shift that doesn't reverse when inflation comes down. Once consumers get used to subscribing rather than owning, it changes expectations permanently. We saw that with music and movies. Cars might be next. Luna: Especially if the cost of ownership keeps rising relative to income. With average hourly earnings up only about 2 percent year-over-year in real terms, that gap is widening. Lucas: So the used car market isn't just about cars. It's a window into how stagflation rewrites consumer behavior — and how industries adapt when the old models stop working.