Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Why Hotel Rooms Show Up in Core Inflation
Transcript
- Lucas: Luna, I booked a hotel room last week for a conference in Chicago. Nothing fancy — a three-star near the convention center. Two hundred thirty bucks a night. I almost choked. Luna: That sounds about right. I was looking at rates for a family trip to Orlando in June, and the numbers were eye-watering. What's going on? Lucas: So we got the April CPI print a few weeks ago — headline inflation came in at 3.4 percent year-over-year, core at 3.6. Those are down from their peaks, but one category jumped out: 'lodging away from home.' That includes hotels, motels, even Airbnb. It rose 2.1 percent month-over-month in April alone. Annualized, that's over 28 percent. Luna: Wow. And that's part of core CPI, right? Since it's a service, not food or energy. Lucas: Exactly. The Bureau of Labor Statistics puts lodging away from home in the shelter component of core CPI. It's about 3 percent of the overall CPI basket, so not huge, but it's been one of the stickiest services categories over the past year. And the Fed watches core services ex-housing very closely — that's the so-called 'supercore' inflation that Chair Warsh has mentioned. Hotel rates are a direct input there. Luna: So when you or I pay more for a hotel, it's not just an annoyance — it registers on the Fed's dashboard. Lucas: Exactly. And the Fed's preferred gauge, the PCE price index, also tracks lodging services. March PCE was up 2.4 percent year-over-year on headline, but services inflation is running hotter. Hotels are part of that story. The breakeven inflation rate — the market's expectation for CPI over the next decade — is sitting at 2.40 percent as of last Friday. That's above the Fed's 2 percent target, and sticky services like lodging are part of the reason. Luna: I've seen headlines about consumer sentiment hitting a record low last week — a lot of that is tied to war and energy, but hotel prices are something people feel directly. Lucas: Right. The University of Michigan sentiment survey hit a fresh low in May, and the Iran conflict is clearly driving some of that anxiety. But lodging inflation is a different kind of pressure — it's not about oil, it's about supply and demand in the travel industry. Business travel is back. Conferences, trade shows, corporate meetings — they're all running at pre-pandemic levels or higher. And on the supply side, hotels are still struggling to staff up. Housekeeping wages have risen sharply, and that gets passed through to room rates. Luna: So it's a labor cost story, too. Not just demand. Lucas: Exactly. Hotel employment is still below where it would be if the pandemic trend had continued. The American Hotel and Lodging Association did a survey — something like 80 percent of hotels report being understaffed. So you have strong demand from business travelers plus constrained supply. That's a recipe for price increases. Luna: And Airbnb is in the same bucket, right? The CPI category includes 'other traveler accommodations' — vacation rentals. Lucas: It does. The BLS samples rates for both hotels and short-term rentals through online travel platforms. So if your Airbnb host raises the cleaning fee or the nightly rate, that also feeds into lodging away from home. One interesting data point: AirDNA, which tracks short-term rental data, shows average daily rates in the U.S. were up about 8 percent year-over-year in April. That's actually a bit lower than hotels, which were up closer to 10 percent. Luna: So hotels are leading the charge. But either way, the traveler feels it. And the Fed sees it. Lucas: And that's why this matters for policy. The effective federal funds rate is at 3.64 percent, and it's been flat since April. The market is pricing in a potential rate cut later this year, but if services inflation stays sticky in categories like lodging, the Fed will hesitate. Chair Warsh has been clear: he wants to see sustained progress on core services before easing. Luna: Let's zoom out a bit. How does lodging inflation compare to other services? Is it an outlier? Lucas: It is. Most services categories are running between 3 and 5 percent annualized. Lodging is closer to 8 or 9 percent on a three-month annualized basis. The only other services that are that hot are car insurance and hospital services. So it's a real pocket of heat. Luna: And car insurance we've talked about before — that's partly repair costs and replacement parts. Hospital services are a whole other beast. But lodging feels like it's more discretionary. If hotels get too expensive, can't people just stay home? Lucas: For leisure travel, some substitution happens. People might choose a cheaper destination, or shorten their trip. But business travel is less elastic. If your company sends you to a conference, you're not going to say 'I'll sleep in my car to save money.' So that segment keeps demand high. And the mix is shifting: business travel is recovering faster than leisure in 2026. According to the Global Business Travel Association, U.S. business travel spending is expected to exceed 2019 levels this year for the first time. Luna: That's a big milestone. So the lodging inflation is partly a recovery story — a sign that the economy is running hot in certain sectors. Lucas: Exactly. And that's what makes it tricky for the Fed. They want the economy to grow, but if business travel pushes up hotel rates and that feeds into core services inflation, it could delay rate cuts. The Russell 2000, which tracks small cap companies, is up 3.4 percent in the past five days — that suggests investors are optimistic about the domestic economy. But the market also wants lower rates. Those two things are in tension. Luna: Speaking of the market, the S&P 500 is at 7,473, up 1 percent in five days. So risk appetite is there. But if the Fed stays on hold, that could eventually weigh on valuations. Lucas: We'll see. For now, the takeaway for listeners is: if you're planning a summer road trip or a business meeting, book early. Hotel rates are likely to keep rising through the third quarter. And every time you swipe your card at check-in, you're contributing to a data point that the Fed is watching. Luna: Which is kind of wild when you think about it — your vacation becomes a macroeconomic signal. Lucas: Look, if walking through the economy with us has made something click — maybe you think about your own spending differently, or you follow the data more closely — we've done our job. We deliberately don't run ads on these episodes, and that's a choice. If you want to support that choice, there's a simple way: buy me a coffee dot com slash fexingo. No pressure, just a nod to keep it ad-free. Luna: Yeah, it's a small gesture that means a lot. We love digging into these numbers, and knowing listeners appreciate it keeps us going. Lucas: Alright, back to the data. So one thing I want to flag: lodging inflation is also a potential tailwind for REITs that own hotels. The hotel REIT sector has been performing well — up about 12 percent year-to-date. That's another angle for investors. Luna: Interesting. So if you own shares in a hotel REIT, rising room rates boost your dividends. It's a direct pass-through. Lucas: Exactly. And the bond market seems to be pricing in that inflation will stay elevated in services. The ten-year breakeven rate is at 2.40 percent, as we mentioned, and it's actually ticked up a basis point from last week. That tells you the market doesn't see inflation falling much further without a real demand slowdown. Luna: So the lodging data is a microcosm of the bigger inflation puzzle — supply constraints, labor costs, strong demand. And it's all playing out in real time. Lucas: It really is. And that's why we spend time on these individual categories. The headline number masks a lot of variation. If you only look at CPI at 3.4 percent, you miss the fact that hotels are running at 8 percent, that used cars are climbing again — that's a whole other episode — and that some goods categories are actually deflating. The devil is in the detail. Luna: And for anyone listening who's traveling soon, maybe this helps explain why that room costs what it does. It's not just the hotel trying to gouge you — there's real economic pressure behind the rate. Lucas: Exactly. So next time you're at the front desk, you can impress your travel companions with a mini-lesson on core CPI and the Fed's supercore. Luna: I think I'll leave that to you, Lucas. I'll just quietly wince at the bill. Lucas: Fair enough. That's all for this episode of Inflation Explained. We'll be back next week with another angle.