Hot core services summer could spoil the Fed's repose

Hotel industry leaders anticipate that there won't be a decrease in the number of people looking for accommodation despite the Federal Reserve's efforts to discourage spending.

The airline industry is performing at the same level as it did in 2019 and it seems that American citizens have a significant amount of surplus money left to spend, according to the latest statistics from the Federal Reserve.

It is possible that there will be another summer where spending is high. This part of the economy is causing problems for the Fed policymakers. They want to bring the inflation rate back to their 2% target, and they are keeping an eye on this area as they discuss whether or not interest rates need to increase.

On Tuesday, the Fed's latest two-day policy meeting kicks off. Most investors and experts anticipate that the U.S. central bank will keep interest rates as they are, following a run of ten rate hikes since March 2022 that brought the benchmark federal funds rate up from almost nothing to its current range of 5% to 5.25%.

However, it is anticipated that the Fed will also demonstrate their readiness to increase interest rates once again in July, subsequent to the brief pause.

Policymakers are scheduled to receive May's latest inflation data shortly before the meeting commencement, potentially impacting the discussion.

The main rate of inflation could go down due to the sluggish increase in prices of food and energy. However, experts believe that the key measure of "core" inflation, which takes into account a majority of services offered in the U.S., may not see much improvement. According to a recent survey by Reuters, economists predict that the core consumer price index in May will jump by 5.3% on a yearly basis compared to 5.5% in April. This indicates a dismal slowdown for an indicator that has remained mostly stagnant this year.

Around 66% of the United States' economy comes from services. Even though certain services such as housing assistance may contribute to lowering the overall inflation rate soon, a majority of the other service industries are still keeping the inflation rate at a level that is causing concern.

Although the Federal Reserve officials are patiently waiting for consumers to reduce their spending, and constantly monitoring the statistics on credit card payment defaults and other specific details to identify indications that the demand is starting to decrease significantly, there have only been slight changes at present.

During the company's first quarter earnings call in late April, Christopher Nassetta, the Chief Executive of Hilton Worldwide Holdings Inc, expressed that there may be a decrease in growth at some point. However, he believes that this will most likely occur in the latter half of the third quarter and continuing into the fourth quarter. Despite this, Nassetta remains optimistic about the business, as there is still sufficient momentum and the economy as a whole appears to be quite robust. There is also more faith in the Federal Reserve.

Despite the fact that hotel prices are now approximately 17% higher than they were in 2019, hospitality analytics firm STR reported that U.S. hotels managed to sell approximately 404 million nights in the first four months of this year, which is roughly the same number as they sold between January to April in 2019.

According to Jan Freitag, who serves as the national director of hospitality analytics at CoStar Group, it's anticipated that there will be sustained interest from customers.

Freitag observed that consumers were highly intrigued by the removal of the right to travel as it led them to believe that it could happen to them in the future. However, with the decline in restrictions and health concerns, there has been a surge in travel.

People who eat out may opt for cheaper options, but according to OpenTable's records, the number of people dining in restaurants is similar to or higher than it was last year. Additionally, the food service sector continues to have one of the highest rates of job openings in the United States.

Although demand remains high, prices may still rise at a slower pace. STR reported that the average price of a hotel room in April increased by only 3.4% compared to the same month in the previous year. This is a significant decrease from the increases of over 30% that were seen in some months in 2022.

However, it's not only industries like travel and hospitality, which are commonly chosen for "revenge spending," that have increased pricing levels.

The top economist of Deutsche Bank in the US, Matthew Luzzetti, predicts that salaries will increase rapidly and result in a notable rise in healthcare inflation in the next few months. He adds that this development will act as a beneficial force, and benefit overall inflation.

Following the surge in prices this year, the Federal Reserve has been anticipating various modifications to slow down the rate of inflation as the economy progressively reopens after the pandemic while seeking stability.

A few alterations have occurred. The delivery networks for commodities are mostly mended, and the speed of commodity cost inflation has reduced. International food and fuel costs have lessened after unexpected occurrences due to Russia's takeover of Ukraine.

The services industry in the United States is highly reliant on human labor, making it different from other sectors of the economy. However, even though the industry is suffering from a scarcity of workers and an increase in wages, it has not reached its full potential.

The Federal Reserve is facing a difficult decision on whether to raise interest rates quickly to combat inflation or keep rates lower for an extended period and hope that inflation decreases without causing significant harm to the economy, such as an increase in unemployment.

The two methods have varying hazards associated with them. One of them involves implementing a policy that goes too far, leading to excessive job loss by tightening financial conditions too much. On the other hand, the other method poses the risk of causing inflation to linger for an extended period, resulting in changes in public opinions and becoming a fixed component in planning while remaining at a higher level.

Former director of monetary policy for the Federal Reserve, William English, who is currently a professor at the Yale School of Management, stated that there is no one optimal method for determining which option offers a greater balance between benefits and drawbacks.

English stated that much of it relies on intuition and perception because there is a limited comprehension of how societal anticipations concerning inflation are established, and how these anticipations impact the trajectory of costs and salaries.

At present, the top priority for the Fed is to prevent the start of any shifts in expectations. The more prolonged the period of elevated headline inflation rates, the more worrisome it becomes.

Written by Howard Schneider; Revised by Dan Burns and Andrea Ricci.