Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / How Eurozone Hotel Prices Are Driving Services Inflation
Transcript
- Lucas: So we talk a lot on this show about services inflation in the Eurozone — how it's been running hot, how it's split between core and periphery. But there's this one sub-component that I think is doing a lot of the heavy lifting, and it's not getting enough attention. Luna: Which one? Lucas: Hotels. And package holidays, broadly — what the statisticians call 'accommodation and travel services'. The latest ECB data for May shows services inflation at 5.2 percent year-over-year. But when you strip out accommodation, that number drops to about 4.1 percent. So hotels alone are adding more than a full percentage point to the headline services figure. Luna: That's massive. And it's not just a blip — we've seen this for over a year now, right? Lucas: Exactly. The post covid travel rebound has been remarkably persistent. People really wanted to take those trips in 2022 and 2023, and the narrative was 'this is catch-up demand, it'll fade'. But here we are in mid-2026, and hotel prices in tourist-heavy Eurozone countries are still rising at double-digit rates. In Spain, accommodation costs were up 14 percent year-over-year in April. In Portugal, similar. In Italy, about 12 percent. Luna: And in Germany? Lucas: Barely 2 percent. So you've got this real divergence within the Eurozone — Southern Europe seeing a travel-driven inflation spike that the core isn't experiencing to nearly the same degree. And that creates a headache for the ECB, because their interest rate tool can't differentiate between a hotel in Barcelona and a hotel in Berlin. Luna: Right — they raise rates to cool demand, but they're cooling demand across the whole zone, not just the sectors that are overheating. Lucas: Precisely. And the risk is that they overtighten for the German economy, where services inflation is much more moderate, just to rein in Spanish hotel prices. Of course, there's an argument that higher rates could actually dampen tourism demand overall — if borrowing costs are high, maybe fewer people book expensive holidays. But the data so far suggests travel demand is pretty interest rate inelastic. People seem to be prioritising trips over other discretionary spending. Luna: That's the revenge travel effect that just keeps giving. But it's also pulling workers into tourism and hospitality, which then creates labour shortages in other service sectors — healthcare, education, even some manufacturing support roles. I saw a stat that Spain added 300,000 hospitality jobs in the last year, while its tech services sector is struggling to fill roles. Lucas: That's the secondary effect that doesn't show up in the inflation print directly, but it feeds back into wage pressure. If hospitality wages rise to attract workers, that puts upward pressure on prices in that sector, and also makes it harder for other sectors to compete on pay. So you get this self-reinforcing cycle in the tourism-heavy economies. Luna: And the ECB is watching this closely. At the last press conference, Lagarde specifically mentioned 'travel-related services' as a component they're monitoring. But they can't target it directly. Lucas: No, they can't. And I think that's the uncomfortable reality — the ECB's main tool is blunt. They've raised rates a lot over the past couple of years, and it has brought down headline inflation. But this core services piece, especially the travel part, is proving sticky because it's driven by factors that aren't very sensitive to interest rates: pent-up demand, shifting consumer preferences toward experiences over goods, and supply constraints in the hospitality sector. Luna: On the supply side — hotel capacity hasn't fully recovered in some places. During the pandemic, a lot of smaller hotels closed permanently, and new construction has been slow because of high construction costs and labour shortages. So you've got less supply facing very strong demand. Lucas: Yeah, and that's structural. It's not going to resolve quickly. So the question becomes: how long can the ECB tolerate above-target services inflation that's largely driven by one sector in a subset of countries? Because if they keep rates high to crush that, they risk damaging the broader economy — especially in countries where services inflation is already benign. Luna: And that's the classic optimal currency area problem, isn't it? One size fits all, but the fit is never perfect. Lucas: Exactly. And it's playing out in real time. Look at the bond market — you see spreads widening again between German Bunds and Italian or Spanish bonds. Part of that is fiscal concerns, but part is the market pricing in different inflation trajectories and therefore different monetary policy paths, even though the ECB has a single policy rate. Luna: Speaking of which — if you're finding this analysis useful, and walking through the economy with us has made something click, there's a small way to keep it going. A handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's what funds making episodes like this one. No ads, no sponsors. Just listener support. Lucas: Yeah, it's that simple. And it genuinely makes a difference — allows us to dig into these specific data points instead of just doing surface-level commentary. So if that's something you're open to, we appreciate it. Luna: Alright, let's get back to the inflation split. Lucas, you mentioned bond spreads — but there's also an interesting effect on the euro itself. Lucas: There is. The euro has actually strengthened a bit this year, partly because the ECB has kept rates higher than the Fed recently, and partly because the Eurozone trade surplus, though shrinking, is still positive. But if the inflation divergence continues and the ECB is forced to keep rates higher for longer to contain Southern European services inflation, that could keep the euro elevated — which then hurts exporters in Germany and other core economies. So it's all interconnected. Luna: And exporters are already facing headwinds from global trade tensions and a stronger euro. So you've got a scenario where the anti-inflation policy is itself creating competitive pressures. Lucas: Right. And the ECB is aware of this. In their latest staff projections, they actually revised down growth forecasts for Germany while keeping them roughly flat for Spain and Italy. So the markets are pricing in a kind of two-speed recovery — or two-speed inflation, at least. Luna: What's the outlook for the next few months? Travel season is just getting started — summer bookings are reportedly very strong. Lucas: Yeah, forward data from travel agencies and airlines suggests another bumper summer. So accommodation prices will likely stay elevated through at least September. That means services inflation probably doesn't fall much in the third quarter. The ECB might see that as a reason to hold rates steady for longer, maybe even into 2027. Luna: Even if core goods inflation is already below target? The latest data had core goods inflation at 1.2 percent. Lucas: That's the tension. Core goods are subdued — actually below the ECB's 2 percent target. But services are above, and the services component is about two-thirds of the core inflation basket. So the overall core is still above target, driven almost entirely by services. And within services, travel and accommodation are the biggest contributors. Luna: So you could argue that if you stripped out travel, the ECB would already be cutting rates. Lucas: I think that's a reasonable argument. Some economists have suggested the ECB should look at 'core core' inflation — excluding not just energy and food, but also travel-related items. But the ECB has resisted that, partly because travel spending is a real part of household budgets, and partly because it's not that easy to define cleanly. Luna: What about the impact on consumers? If you're a household in Germany not planning a holiday abroad, you're not feeling this travel inflation at all. But you are feeling higher interest rates on your mortgage or car loan. Lucas: Exactly. And that's the distributional effect. The ECB's rate hikes are disproportionately affecting people who don't benefit from the travel boom — and disproportionately affecting countries where the travel boom is less pronounced. It's a transmission asymmetry. Luna: So is there any targeted policy that could address this? I mean, fiscal policy could play a role. Lucas: In theory, yes. Countries like Spain and Portugal could use fiscal tools — like VAT reductions on accommodation, or subsidies for hotel construction — to increase supply or reduce price pressure. But that would require coordination with ECB policy, and we know that's not always smooth. Plus, some of these countries have high debt levels, so they're limited in how much they can spend. Luna: And the political will might not be there. If you're a Spanish government, are you really going to try to cool down your tourism boom when it's driving growth and employment? Lucas: Probably not. So the burden falls on the ECB to manage the overall inflation target, even if it means keeping rates higher than the core economies would like. And that's why this episode matters — it's not just a niche statistic about hotel prices. It's at the centre of the monetary policy debate for the Eurozone right now. Luna: And it's not going away anytime soon. Even after summer, we'll have to watch what happens with winter tourism and business travel. But for now, the takeaway is clear: if you want to understand Eurozone inflation, look at where people are sleeping when they travel. Lucas: That's a good way to put it. And we'll keep tracking it through the year. For The European Economy Podcast, I'm Lucas. Luna: And I'm Luna. Thanks for listening.