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Issue 1110, 1 July 2022. Subscribers: read the digital edition here

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From Merryn Somerset Webb, MoneyWeek’s editor-in-chief 

I wonder if you have finished making your summer holiday plans yet? If you have not you might want to get going – particularly if you think you might need a hire car. In the summer of 2019 you would have been able to rent a normal family car for around £310 a week. Try and get your hands on the same this year (good luck to you) and it will cost you more like £652. Over double. Why?

The answer is more interesting than you think – this is the post-pandemic global economy in a nutshell. When the lockdowns began, the car-hire business pretty much shut down globally – and car-hire firms, keen to raise cash and cut costs, sold down their fleets (often at very low prices). At the time, they presumably assumed that when demand returned, there would be no supply problem – and they would rebuild those fleets cheaply (car manufacturers have a history of giving the rental agencies huge discounts anyway).

Whoops. When 2021 dawned, cars were not just not remotely cheap, they were almost impossible to come by. Thanks to the fact that computer-chip manufacturers had either suffered rolling shut downs or switched production from car chips to chips for products everyone wanted during lockdowns (phones and laptops), there were precious few semiconductors available for car manufacture – a situation made significantly worse by the war in Ukraine (Ukraine produces neon, which is vital for chip production). The upshot? Industry associations reckon that 2.2 million fewer cars have hit the road worldwide this year than would have with no chip shortage (800,000 of those in Europe). There just aren’t enough cars.

Enhanced demand meets restricted supply

Still, this isn’t just about the supply shortage. It is about the fact that when demand came back, it really came back. Global hotel occupancy rates were above pre-pandemic levels in April and May this year (63% in May 2022 versus 60% in May 2019) and look like they will stay that way all summer (this is also a reminder of just how odd this economic downturn is – you don’t normally get excess demand for leisure services with a recession looming). Car-hire demand is at least as high as in 2019 (maybe higher, as some of the Covid-wary will still prefer private cars to public transport) and around 33% higher than summer 2021 already, according to Amadeus Hospitality (around half of cars are booked only a week in advance).

So there you have it. Enhanced demand meets restricted supply, and prices go nuts (even before you start trying to pay for fuel. This will sort itself out – as we know, the solution to high prices is always high prices (which prompt rises in supply). But it won’t do so in time for your summer holidays.

On the plus side, there is a silver lining here. Most of us hate renting cars (the endless insurance and fuel scams, the queues, the laughably inefficient logistics). Now we might not have to. At £600 a week, it is almost always going to be cheaper to arrange taxi transfers from airport or station to hotel and back – and to anywhere else you might want to go in between. Cheaper, easier (no queues, maybe fewer scams) and more fun too (more rosé). In this week’s magazine we look at how thrift is one answer to beating inflation. I’m not sure taking taxis instead of renting a car quite fits in with the spirit of that idea, but it is at least a start. I’m a convert.