Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Reshaping the Car Rental Industry
Transcript
- Lucas: It's July 17, 2026. You might have noticed that renting a car at the airport costs noticeably more than it did two years ago. The average daily rate is up about fifteen percent since 2024, even as inflation overall has started to ease a bit. But the deeper story is not just higher prices — it's a structural shift in what rental companies are willing to put on their lots. Luna: And the poster child for that shift is Hertz. In early 2025, they announced they were selling twenty thousand electric vehicles — about a third of their EV fleet — and replacing them with gas-powered cars. Lucas: Right. And that decision tells you almost everything about how stagflation — high inflation coupled with slow growth — is reshaping this industry. Hertz had gone all-in on EVs in 2021, ordering one hundred thousand Teslas and committing to a huge Polestar partnership. The idea was that EVs would lower maintenance costs and appeal to eco-conscious travelers. But the macro environment broke that math. Lucas: You know, we keep this show ad-free by design. No commercials, no sponsors reading scripts. If you've gotten value from our conversations and want to support that choice, you can find us at buy me a coffee dot com slash fexingo. That's it. Low key. Luna: Yeah. It's a small thing that keeps us independent. Appreciate anyone who chips in. Lucas: So back to Hertz. The first problem was repair costs. When you run a rental fleet, vehicles get banged up. With EVs, body shops are fewer, parts take longer to source, and labor rates are higher because technicians need specialized training. Hertz disclosed in their 2024 annual report that collision and damage repair costs per unit for EVs were roughly double those for comparable gasoline vehicles. Luna: And that's under normal conditions. But we're in a high-inflation environment where both parts and labor have been rising faster than general CPI. The core CPI — which strips out food and energy — was still at 336.1 as of June, barely off its peak. Lucas: Exactly. So those cost pressures weren't going away. Then there's insurance. Rental companies self-insure a lot of their risk, and claim costs have surged. Inflation in auto insurance has been running in double digits year-over-year for most of the past two years. That hits Hertz directly. Luna: But the really killer piece was resale values. Hertz buys cars expecting to sell them after twelve to eighteen months. That residual value is a huge part of their profit model. When they bought those Teslas in 2021-2022, the used EV market was strong. Then Tesla cut new car prices repeatedly, and the EV resale market cratered. Lucas: By early 2025, used Tesla Model 3s were trading for about thirty percent less than Hertz had projected. So they were taking a massive loss on every EV they sold. Their CFO said the EV sell-off would cost the company about $245 million in depreciation and write-downs. That's a concrete number that shows how the stagflation cocktail — high costs and weak demand — wrecked their EV bet. Luna: And it's not just Hertz. Enterprise and Avis have also slowed their EV purchases. Avis said on their last earnings call that EV adoption in the rental fleet will be "market-driven" — code for "we'll wait until the economics work." Lucas: Right. So what does this mean for a consumer renting a car today? First, fewer EV options. If you wanted to try an electric car on a weekend trip, that's getting harder. Second, higher overall rates. The companies are passing on the higher costs of insurance, repairs, and fleet turnover. And third, the fleet mix is shifting back to smaller gas cars and crossovers because those vehicles have better residual values and lower repair costs. Luna: The broader lesson is that stagflation punishes industries with high capital intensity and thin margins. Rental car companies have to buy and sell assets constantly. When inflation erodes your residual values and raises your operating costs, while economic growth stays sluggish, you can't sustain a high-risk strategy like a massive EV bet. Lucas: And we see that play out in the data. The 10-year breakeven inflation rate is at 2.22 percent — that's the market's expectation for average inflation over the coming decade. It's come down from its 2022 peak, but it's still above the pre-2020 average. And real GDP growth, while positive at 2.1 percent annualized, is barely keeping pace with population and productivity trends. That slow-growth, still-inflationary environment is exactly what makes the rental industry so tricky right now. Luna: One more number: the latest CPI reading was 332.6, down a bit from the prior month. So headline inflation is cooling. But the core CPI at 336.1 shows that the underlying price pressures — especially in services like vehicle repairs and insurance — are stickier. That's the stagflation signature. Lucas: So for the rental car companies, the playbook is shifting. They're shortening their hold periods, buying more vehicles with strong resale histories, and being far more cautious about new technology bets. It's a defensive posture, and it's likely to persist until either growth accelerates or inflation falls further. Luna: And if you're planning a trip, maybe book that rental car sooner rather than later. Rates are likely to keep creeping up. Lucas: That's the reality of stagflation in a capital-intensive industry. Thanks for listening.