Why Hotels Should Be Worried Now About Looming Stagflation

Hotel executives may be tuning out talk of future stagflation as they focus on serving today's pent-up demand. But some economists worry that stagflation could emerge in the U.S., Europe, or Japan.

What is stagflation for those who didn't live through it in the U.S. in the 1970s? It's a strange brew of weak growth and stubborn price escalation. If left unchecked, it boosts unemployment in a way that hamstrings policymakers trying to escape it.

In the past month, about three out of four investment fund managers surveyed by Bank of America Global Research predicted U.S. stagflation. The former chairman of the Federal Reserve Ben Bernanke said stagflation is a risk, as did billionaire Ray Dalio and the Financial Times' chief economics commentator Martin Wolf. Possible stagflation drivers include the pandemic's shocks to supply chains, spiking energy costs, and possible missteps by central bankers and governments.

"It's been decades since we've had the specter of stagflation," said Frits Dirk van Paasschen, the former CEO of Starwood Hotels & Resorts Worldwide. "Plus, the world was an entirely different place then. We're in terra incognita, as they say."

No wonder some travel leaders wonder if they should push for growth or push on the brakes.

Ordinarily, the hotel sector is cyclical. Its fortunes rise and fall with economic boom and bust. Nearly everyone has an intuitive sense of which hotel companies might prosper during booms — and which ones may struggle in downturns.

But things are getting weird — to use a technical term. The travel sector is ordinarily a leading indicator of recession. But maybe not this time. Today's room rates seem invincible in many U.S. markets, surpassing 2019 levels — even though demand often hasn't recovered. The U.S. fourth quarter could be strong thanks to the revival of business transient and group travel, PwC forecasted in May.

Yet if stagflation emerges, so will fresh challenges. Some hotel companies will prove more resilient than others. Key factors could be hotel company profitability, their cost structures, the types of guests that they mostly serve, and the nature of their debt burdens.

Most hotel groups appear sturdier than they were before th