European hotel, restaurant and bar owners are eagerly anticipating a busy summer as millions of people flock to the Euros football tournament, Taylor Swift concerts and the Olympics. But one group is less excited: central bankers worried about sticky inflation.
The rush to major sporting and cultural events is already fuelling a surge in prices for many items in high demand in Europe, including hotel rooms and airline tickets.
The cost of hotels in Portugal shot up almost a fifth from April to May — taking annual inflation in the sector to nearly 14 per cent — when Swift brought her record-breaking Eras tour to Lisbon with two concerts in May.
Hotels across Germany have been more than doubling prices for nights when Euro 2024 matches are happening in the 10 cities hosting the tournament, while bars and restaurants report surging demand since the games started this month.
But the price spike in the hospitality sector comes as both the European Central Bank and the Bank of England remain concerned about sticky services inflation, leading to expectations they will cut interest rates at a slower pace.
The ECB cut rates for the first time in nearly five years in June to 3.75 per cent, after Eurozone inflation fell from 10.6 per cent at its 2022 peak to 2.6 per cent in May, close to its 2 per cent target.
However, policymakers worry that services inflation in the single currency bloc is still too high after it accelerated to 4.1 per cent in May, its fastest pace since last October.
One of the biggest concerns is that high Eurozone wage growth of 5 per cent is pushing up costs and therefore prices at labour-intensive services companies such as hotels and airlines.
Consumers have also switched from spending more on goods during pandemic lockdowns to splashing out on services such as restaurants and holidays — especially as their purchasing power is restored by wages rising faster than inflation.
Isabel Schnabel, an ECB executive, said this week that sticky services inflation was a factor in “the difficult last mile” of disinflation, meaning policymakers needed to stay flexible on further rate cuts.
Analysts at Goldman Sachs forecast a further pick-up in Eurozone services inflation to 4.2 per cent in June when that data is released next Tuesday, predicting that Germany could be “further affected by the Euro 2024 tourist inflow”.
In the shadow of Cologne’s imposing cathedral, the Gaffel am Dom brewery has been packed every night this week with football fans eating, drinking and watching games — a clear example how the city benefits from an estimated 100,000 extra visitors on match days.
“Football fans dominate the scene at the moment,” the brewery’s marketing manager Thomas Deloy said, adding that every table had been reserved for “months in advance” on evenings when the German team was playing.
Andree Haack, deputy mayor of Cologne, cited a study that found non-resident fans attending the recent European basketball tournament in the city spent €750 a day on average and predicted that this would be surpassed by those visiting for the football. “Prices for hotels have more than doubled on match days,” he said.
In the UK, Taylor Swift’s tour that started in Edinburgh this month will add to already high price pressures in the services sector with a 12 per cent annual price increase across the UK for a night at a hotel in May and an 11 per cent annual increase for concert tickets. A total of 720,000 fans are due to go to her eight sold-out concerts in London’s Wembley Stadium.
The potential for a flare-up of services inflation could trouble the BoE and delay when it starts to lower borrowing costs. Even though overall UK inflation fell to its 2 per cent target in May, services inflation remained worryingly high at 5.7 per cent.
However, while Taylor Swift concerts and the Euros may be eye-catching, economists say central bankers should pay less attention to the impact of these one-off events and focus instead on the medium-term trend of disinflation.
Haack said he was unsure what lasting impact such events had on Cologne’s economy. “We have lots of big events here every year and even on a normal day the hotels and restaurants are quite full,” he said.
Rob Wood, chief UK economist at Pantheon Macroeconomics, said the strength in domestic hotel demand was widespread across UK regions, “so, we doubt hotel prices were driven by a one-off event such as a concert”.
Swift performed four times in Paris in May, yet this seemed to have little impact on annual French hotel inflation, which still slowed to a three-year low of 0.4 per cent last month.
“I think the ECB should look through these events to a certain extent,” said Tomasz Wieladek at investor T Rowe Price.
Last year, after singer Beyoncé kicked off the European leg of her Renaissance tour in Stockholm, an economist at Danske Bank said it caused higher inflation in the country.
George Moran, an economist at Japanese bank Nomura, looked into Beyoncé’s impact on Swedish inflation last year and said “the only statistical effect on a wide range of variables was restaurants and hotels inflation”.
He said this year’s events across Europe “may cause a small bump in services inflation, which is the most concerning for the ECB at present, but the effect will be temporary and not sufficiently large to unnerve” the central bank.
“Most direct estimates of the economic impacts of these events are likely to be an overstatement,” he added.
Kate Nicholls, head of the UKHospitality trade body, said Swift’s concerts and the Euro 2024 tournament could bring British hotels, restaurants and pubs an extra £1.6bn of revenue if the England team reached the final.
However, she warned that companies in the sector had been able to pass on only about half the 12 per cent increase in their costs last year.
“Two to three weeks of stronger trade isn’t going to wipe out six months to 12 months of very tough trade.”