HENDERSONVILLE, Tennessee—During the past few years the U.S. Federal Reserve Bank has injected vast amounts of money into the financial system to support lending and assist an ailing U.S. economy. With the influx of these funds, however, the risk of inflation is often mentioned as a negative consequence as it chips away at hoteliers’ ability to increase rates in real terms. In other words, if average daily rate increases 2% and inflation stands at 2%, there is no real rate growth.
This article examines the relationship of inflation as measured by the consumer price index and ADR* over time to show that for a majority of the time, hotel room rates outpace inflation, sometimes by a wide margin. This implies that, in general, hotel operators should not fear an increase in CPI because the corresponding ADR increase more than makes up for it and allows for real rate growth and—hopefully—profit growth.
Since 1989, CPI has grown by approximately 2.8%, with swings from more than 6% (during the late months of 1990) to a decrease in more than 1% (in the most recent recession during early to mid-2009). Since February 2012, CPI has grown by less than 2% each month.
The following chart shows the monthly CPI and ADR percent change over time, back to 1990.
The relationship between the two charts seems tenuous at best. For a majority of months, ADR growth seems to outpace CPI, but in the months when ADR growth falls below CPI growth, it does so by a wide margin. The impact of the last three recessions (1990 to 1991, 2001, 2009) is clearly visible on ADR performance as room rates declined considerably during those three time periods. Notably, during this 279-month time series, CPI only declined in nine months. These nine months all fell during 2009.
The point difference between CPI percent change and ADR percent change is shown here (by subtracting CPI percent change from ADR percent change).
Dissecting the data, beginning in 1989, we observe the following periods of ADR growth premium and discounts versus CPI percent change over time:
Since we began collecting data in 1989, we recorded an equal number of time series with a premium or discount of ADR percent change to CPI percent change, namely four. It is noteworthy that in those periods when ADR percent change is less than the CPI percent change, the negative impact is stronger than in the periods when ADR percent change outpaces CPI percent change. The table below shows more detail about the average discount and premium timeframe.
One takeaway is the number of months in each series varies noticeably. In those periods when ADR grows faster than CPI, it does so for longer, namely for 44 months on average, compared with the average 28.5-month period when CPI increases more than ADR.
Discounts by chain scale
The average U.S. data presented above gives only directional indications of the ADR performance in relation to CPI growth. More telling is the look at the performance data by chain scale as shown in Table 3. The data here shows the average positive (or negative) point difference during months when ADR growth is higher than CPI growth by scale (labeled here: premium) and lower than CPI growth (labeled here: discount).
Not surprisingly, the higher the chain scale (and therefore the absolute ADR), the higher the ADR percent change premium. In other words, more expensive hotels grow rate faster than CPI grows. On the other hand, those higher-end hotels also discount ADRs more heavily and when rates drop, those hotels have to absorb the double hit of increasing inflation and ADR discounts. Since expenses often grow at least at the rate of inflation, the end result is therefore likely much lower profitability.
Interestingly, even though all chain scales outperform CPI in the good times, the average discount to CPI (in absolute terms) during times when CPI growth outpaces ADR growth are much steeper. So, when times are bad, they are really bad.
Since the numbers above are averages, it is probably fair to assume that outliers skew the results. To get a sense of these outliers, we looked at how much each scale outperforms CPI in an up market or how many points the ADR percent change is lower than CPI during more challenging times. Table 4 shows the average ADR point premium over CPI growth for the top 10% best performing months. For luxury, upper-upscale and upscale chain affiliated hotels, the premium can be more than 6% as was the case during 1995 and 2006. Conversely and as already hinted at in Table 3, the average of the bottom 10% months when ADRs were being discounted in 2009 shows ADR declines that are double-digit points lower than CPI growth.
Overall, the higher-priced chain scales outperform CPI more often than the lower-priced scales. Table 5 shows how many months, starting in January 1989, each scale was able to command a percent change point premium or discount when compared to CPI percent change.
Luxury, upper-upscale, upscale and upper-midscale chain hotels reported more months when ADR growth was at a premium to CPI growth. However, for the two lower-rated chain scales, midscale and economy, our time series suggest that more often ADR growth is below CPI percent change.
Takeaways
Monitoring inflation through CPI growth is important because inflation has the potential to impact profitability if ADR growth is lower than CPI growth. Our data shows that for the upper end of the chain scale spectrum, the majority of time ADR grows faster than CPI and outperforms CPI growth by between 2.7 and 4 percentage points. That said, hotels in these chain scales also report much stronger ADR discounts during a downturn and underperform CPI growth by a decrease of 3.6 to 6.1 percentage points. Economy properties on the other hand only outperform CPI by, on average, 1.4 points but also only underperform CPI growth by, on average, a decline of 2.8 points.
Inflation has not been a large issue as of late, but based on our data, hoteliers may rest assured that even if CPI growth picks up—using history as a guide—ADR growth should mostly outpace CPI growth.
*The two data sets used are the Consumer Price Index for all Urban Consumers as published by the Bureau of Labor Statistics, accessed via Federal Reserve Economic Database and U.S. and chain-scale trend data from STR, parent company of HotelNewsNow.com. For the CPI-percent change calculation, we calculate the percent change from the same month last year and not, as is often done, for consecutive months.