Hotel executives see no letup in demand even with the Federal Reserve trying to stomp on spending.

Air travel is hovering near or above 2019 levels, restaurant attendance is holding up, and based on the most recent Fed household data U.S. consumers likely still have a few hundred billion dollars of extra savings to burn.

Another summer of strong spending may lie ahead, in other words, in the part of the economy Fed policymakers feel is proving most troublesome in returning inflation to their 2% target – and where their attention is focused as they debate whether interest rates need to rise further or not.

With the Fed starting its two-day policy meeting on Tuesday, officials got a headline dose of good news in data showing the Consumer Price Index increased at a 4% annual rate in May. It was the lowest reading in more than two years and caused investors to all but seal their view the U.S. central bank will hold the benchmark federal funds rate steady at its current level between 5% and 5.25% at this week’s meeting.

But the reading was driven by weak food and falling energy prices. Underlying “core” prices, which exclude those items, continued increasing at a 5.3% annual rate and is falling only slowly, a fact Fed officials will watch carefully in deciding whether to resume rate increases in July.

‘PRETTY RESILIENT’

Feeding into that were still strong increases in services, particularly for the provision of housing. Fed officials have been expecting housing services, which include rent and a rent-equivalent calculated for homeowners, to help lower headline inflation. But the relief has been slow in coming, with housing costs still rising at an 8% annual pace in May

Other data in the report left a mixed picture for Fed officials still waiting for consumer demand to crack in earnest – a moment some companies say may be coming but isn’t here yet.

“At some point you will see some slowing. I think realistically, it’s more late third quarter and into the fourth quarter,” Hilton Worldwide Holdings Inc Chief Executive Christopher Nassetta said in late April on the company’s first-quarter earnings call. “There’s enough momentum in our business. The economy broadly is pretty resilient. There’s more confidence in the Fed.”

Hotel demand has remained strong over the first four months of the year, with the 404 million room nights sold comparable to the same period in 2019, according to data from hospitality analytics firm STR.

While the annual pace of price increases has been slowing from last year’s double digit increases, Tuesday’s CPI release showed a measure that includes hotels and motels rose 2.1% from April to May alone.

Demand in the sector is expected to remain healthy, said Jan Freitag, national director of hospitality analytics at CoStar Group.

“It was very interesting to see that when the right to travel was taken away, suddenly in consumers’ minds is ‘that won’t happen to me again,'” with travel booming as restrictions and health fears eased, Freitag said.

Data from OpenTable, meanwhile, shows seated diners still near or above levels seen last year. Prices for “food away from home” rose at an 8.3% annual rate in May, showing little change.

Airfares, by contrast, fell 3% month to month.

Omair Sharif, president of Inflation Insights, said he thought that given current trends, core inflation was due to “soften materially starting next month and through September.”

Other analysts felt the Fed may be in for tougher sledding.

Deutsche Bank Chief U.S. Economist Matthew Luzzetti noted, for example, that fast-rising wages in the healthcare sector “should filter into strong healthcare inflation over the coming months” and be a “strong tailwind” to overall inflation.

‘TOUCH AND FEEL’

Since prices began accelerating in 2021, the Fed has waited for a series of changes to help ease the pace as the economy reopened from the pandemic and established a new balance.

Some of those changes have happened. Supply chains for goods are largely repaired, and the pace of goods price inflation has eased. Global food and energy prices have moderated from shocks around Russia’s invasion of Ukraine.

But the U.S. services market, more labor dependent than other parts of the economy and still experiencing worker shortages and rising pay, isn’t there yet.

For the Fed that presents a tough judgment over whether to move interest rates higher and try to break inflation faster, or stop at a slightly lower rate for a longer period in hopes inflation will gradually subside without major economic damage in the form of rising unemployment.

The two approaches carry different risks – the one of taking policy a step too far, tightening financial conditions too much, and causing unnecessary job loss; the other that inflation hangs around so long it starts to change public perceptions, becomes embedded in planning, and thus gets stuck at a higher level.

There’s no good overall way to measure which provides the better tradeoff, said former Fed monetary policy director William English, now a professor at the Yale School of Management.

“A lot of it is touch and feel,” English said, given that so little is understood about how public expectations about inflation are formed, for example, and how those expectations influence the path of prices and wages.

But for now the Fed has put its priority on not letting expectations begin to move – and the longer headline inflation rates stay elevated the greater the concern.