High Prices Dampen Lodging Spending at the End of 2024

There is progress on inflation, but what does it mean for discretionary spending?

Although the Federal Reserve’s preferred measure of inflation–the Bureau of Economic Analysis’ personal consumption expenditures price index–for December 2024 is not yet released, looking at the consumer price index by the Bureau of Labor Statistics, we can conclude there has been progress on cooling inflation over the past year. While in January 2024 the annual CPI was 3.1%, at the end of the year it was 2.9%. The headway was even more clear with core CPI–which strips out volatile food and energy prices–moving from 3.9% in January to 3.3% in December 2024. 

Although lower price growth is welcomed by U.S. consumers, price levels still remain high, which pushes consumers towards trade offs. Consumers are substituting not only on essentials, but, for those who can afford them, on discretionary purchases as well. 

Higher income cohort goes “economy”

After the COVID-19 pandemic restrictions were lifted, we have observed the release of pent-up demand for discretionary services. While this spending was broad based at the beginning of the “opening”, its longevity has been sustained by the higher income cohort.

Higher income consumers are critical for travel spending, as they typically spend more money and take more frequent trips. However, even for this group, prices can pose an obstacle. The Travel Price Index compiled by the U.S. Travel Association using the Bureau of Labor Statistics data shows that travel costs increased 2.5% year over year as of December. While this rate is lower than topline CPI growth over the same period, several subcomponents had more substantial increases: Airline fares rose 7.9% and food away from home grew 3.6%. The lodging component had more modest growth, rising 2.3% year over year.  

While economists like to describe price changes in terms of comparisons to the same month a year prior, consumers may have different comparison points in their minds. Morning Consult’s survey conducted in June 2024 found that a majority of consumers compare current price levels with a reference frame of at least two years prior. In fact, the most popular selection of time reference for price level comparisons was more than 4 years prior. That’s why in evaluating consumers’ spending behaviors in response to inflation, it is crucial to note the large 5-year price changes as well, as many consumers’ perceptions of price changes may be anchored as far back as pre-pandemic.

Looking at the recent history, it is also important to note that the lodging away from home prices began to pick up in the second half of the year. This time period is also when Morning Consult’s data shows increasing substitution index scores for hotels–especially from higher income consumers. While substitution is still a negative number for this cohort- it has increased dramatically in the same period where we note prices increasing for accommodations.

This lower appetite for travel expenditures is also apparent in Morning Consult’s U.S.  Consumer spending tracker. For the second half of 2024, average spending on hotels has dropped for the higher income group. For airline fares, substitution options are more limited. One may decide to choose economy over economy plus, forgo checking in a luggage or even fly at a relatively inconvenient time. However, for hotels, trading down options are more accessible- from choosing a less expensive hotel, trading down on room types, opting for a “less desirable location” or choosing vacation rental or rooms.

Substitution was also apparent for middle income cohorts. This finding is in line with the US Travel Association’s forecast of contracting domestic leisure spending in 2024. 

More trading down in 2025?

The U.S. consumer economy has generally been described as “resilient” as it recovered from abnormal pandemic conditions. U.S. consumers continue to grapple with high price levels and have experienced significant changes in savings rates, incomes, and hiring conditions among many other economic and financial indicators. As we begin 2025, U.S. consumers are still resilient and, inclusive of high-income cohorts, they are more experienced at substituting. Consumers can trade down only so many times before they run out of available options. Looking ahead in 2025, we may see lower substitution levels from the wealthier consumers. However, for travel spending to grow, not only we would need this group’s real income growth to continue to grow but we would also need to record their price sensitivity levels falling, which indicates that a lower share of them are walking away from purchases because they encounter a higher than expected price. The good news for the travel industry is that we have already begun to record lower price sensitivity at the end of 2024.