Tourism at inflationary hotspots tests ECB

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To the tourists complaining about how much more expensive it is to visit the Greek island of Sifnos this summer, hotel manager Isidora Chandeli has a simple riposte: eggs.

“Our visitors think we are taking advantage of high demand. They don’t consider the high inflation we all face,” Chandeli said. “Just so you understand, a single egg last year cost 25 cents — now it’s 45 cents.”

Around Europe’s tourism hotspots, visitors have faced sharp price increases as businesses pass on rising costs to their customers.

Claudio Scarpa, head of the Venice hotel keepers’ association, said the laundries the city’s innkeepers rely on had linked their prices to energy bills, which soared last year. “That’s had a significant impact on our budgets,” Scarpa said. “It has forced hotels to adjust their prices by 20 per cent.”

Now rate-setters at the European Central Bank are becoming concerned that a fresh wave of summer inflation spurred by tourism could complicate their efforts to keep prices under control.

The cost of flights, hotel rooms and holidays have risen fast as the sector, almost completely shut down in 2020, nears pre-pandemic levels of activity.

Line chart of Annual % change in consumer prices showing Tourism prices are rising faster than overall eurozone inflation

The rebound in tourism, which directly provides about 4 per cent of EU output and indirectly supports 10 per cent, has added to the resilience of the region’s economy, which expanded 0.3 per cent between the first and second quarters.

However, it is also contributing to services inflation. At 5.6 per cent in the year to July, this is now at an all-time high and well above the central bank’s overall target for consumer price growth of 2 per cent.

Fabio Panetta, a member of the ECB executive board, pinned the blame for the latest rise in services prices on “robust” spending on holidays and travel. “It is important to monitor this component and its implications for the risks to overall inflation.”

Tourist queue for a tour of the Sagrada Familia in Barcelona
9.1mn visitors arrived in Spain in June, up 10% from last year © Enric Fontcuberta/EPA/Shutterstock

The evidence of higher costs is plentiful.

Accor, Europe’s largest hotel chain with more than 3,000 sites across the region, said it had increased its average room rate 18 per cent in the first six months of this year from a year earlier.

The average price of bookings through tour operator Tui has risen 7 per cent from last year, returning it to profit for the first time since the pandemic. Its chief executive said this month the recent heatwave and wildfires in parts of Europe had “only damped temporarily the previously strong dynamic”.

The weighted average price of flights in Europe this year has increased 31.6 per cent from last year, according to data provider RDC.

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Data from Airports Council International Europe indicates more visitors are arriving from outside Europe, especially the US. Those long-distance flyers tend to spend a lot more than local counterparts once they arrive.

A survey by the European Travel Commission, a body which promotes tourism in the region, found 41 per cent of travellers in the region expected to spend more than €1,500 per person on summer holidays this year, compared with 33 per cent last year.

Demand, meanwhile, is soaring despite higher prices.

Italy’s tourism minister Daniela Santanchè forecast more than 19mn visitors and €10bn of tourism income in July, despite heatwaves and floods, which helped it to overtake pre-pandemic levels. However, Italian tourist bookings dipped 1 per cent year on year to 82mn in August.

Greece welcomed 5.76mn international visitors in the first five months of this year — up a third from a year earlier and surpassing pre-pandemic levels. Greek tourism revenues hit €1.75bn in May — a quarter higher than in the same month in 2022.

Croatia, which became the eurozone’s newest member when it joined in January, welcomed 2.7mn foreign tourists in June, up 2.8 per cent from last year. 

The picture is similarly upbeat in Spain, where tourism minister Héctor Gómez hailed an “extraordinary” recovery after 9.1mn visitors arrived in the country in June, up 10 per cent from last year.

“People are spending less on cars, or buying fewer clothes, but they aren’t giving up on holidays,” said Ramón Estalella, secretary-general of CEHAT, a Spanish holiday accommodation trade group.

Estalella justified an 8 per cent rise in room rates in the year to June by saying they had still lagged behind overall inflation since 2019. “Hoteliers have not been able to cover the cost of inflation,” he said, adding that many were still paying off debts accrued during the pandemic.

Chandeli shared that sentiment, saying this year’s 15 per cent rise in room rates at the boutique Astra Verina hotel in Sifnos was the first in four years.

Tourists look at the Santorini caldera
Greek tourism revenues hit €1.75bn in May — a quarter higher than in the same month in 2022 © Aris Messinis/AFP/Getty Images

That relative moderation may not be enough to convince the ECB to pause increases in borrowing costs once rate-setters return from their summer break.

The central bank signalled last month it may be ready to pause its string of interest rate rises at its next policy meeting on September 14. But if services inflation stays high, it could be enough to convince them a further rate rise is needed.

“The doves will be able to argue in September that, on the basis of lower forecasts for growth, the ECB should stop hiking,” said Holger Schmieding, chief economist at German bank Berenberg. “The problem is that an expensive summer tourist season could keep core inflation still elevated for a few more months.”



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