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).