Hotel Profit Implications from Rising Wages and Inflation in the U.S.

/Hotel Profit Implications from Rising Wages and Inflation in the U.S.

Hotel Profit Implications from Rising Wages and Inflation in the U.S.

|2016-07-13T10:42:37-04:00July 13th, 2016|

By Jack Corgel

Macroeconomic models based on the Phillips Curve predict that as the unemployment rate declines toward the long-run, natural rate, the pace of wage and price growth accelerates and inflation rises.1 In this paper I analyze the profitability prospects for the U.S. hotel industry in today’s relatively volatile economic environment, keeping in mind the Phillips Curve’s general principle that inflation and employment have an inverse, but relatively stable short-term relationship. Although employment and economic growth in the U.S. have been uneven in recent months, the unemployment rate has declined to less than 5 percent, which many economists believe is close to the natural rate. Growth in wages and salaries, as measured by the Employment Cost Index, has concurrently been moving upward between 2.5 and 3.0 percent during the past 12 months. At the same time, general inflation remains below levels that might typically be expected this late in the cycle, although core inflation is bumping up against the Federal Reserve’s 2-percent target. If the inflation rate continues to move upward as predicted by Phillips Curve models (and encouraged by the Federal Reserve), rising labor costs and other expenses will exert downward pressure on U.S. business profits. Backward movement up the Phillips Curve (with greater inflation) coincides with an expanding economy. In that scenario, prices of goods and services also will rise in real terms if their supply cannot keep up with demand, and producers have the ability to raise prices (absent fixed-price contracts such as leases).

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About Jack Corgel

Jack Corgel holds the Robert C. Baker Chair (Professorship) in Real Estate at the Cornell University School of Hotel Administration and holds the position of the director of graduate studies for the Baker Program in Real Estate. He was the first director of the Center for Hospitality Research at SHA. After receiving undergraduate and PhD degrees from the University of Georgia in real estate and corporate finance, he held faculty positions in several business schools at major universities before joining Cornell. Corgel serves as senior advisor to PKF Hospitality Research (PKF-HR), where he helps the firm develop products for the hotel industry based on property-level financial and real estate performance information, including Hotel Horizons econometric forecast of U.S. hotel market performance. Corgel published 80 articles in academic and professional journals, mainly on the subjects of real estate finance, investment, valuation, and hospitality real estate. His research appeared in the most prestigious journals in real estate (Real Estate Economics), urban economics (Journal of Urban Economics), insurance (Journal of Risk and Insurance), business law (Journal of the American Business Law Association), and hospitality management (Cornell Quarterly and International Journal of Hospitality Management). In addition, he has written for nearly every national journal read by real estate professionals. His textbook, Real Estate Perspectives (with Smith and Ling), was used throughout the nation for introductory real estate courses. He co-edited and wrote chapters for The Cornell School of Hotel Administration on Hospitality: Cutting Edge Thinking and Practice. Corgel’s current research interests include the relationship between the macro-economy and hotel markets and real estate price and capitalization rate forecasting.

Contact: Jack Corgel

[email protected] /607.255.9949

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