How Inflation Affects Australias Hospitality Industry - Research Paper Example

How Inflation Affects Australia’s Hospitality Industry A Research Report September 21, 2007 Executive Summary This study is an investigation into the relationship between inflation and hospitality industry of Australia. Hospitality is one industry which brings huge revenue to a country, and we know how important inflation is to an economy. Thus a study into the subject becomes important for the hospitality industry and the country’s wealth and growth as such. 1. Inflation- Now what is inflation. In simple terms inflation is an increase in money supply. This causes rise in levels of price against standard of purchasing power. It is termed as the increase of circulation of currency. This increase in circulation will result in sudden fall in its value and thus rise the price levels. The American Heritage Dictionary of English Languge states that the inflation is persistent increase of level of consumer prices. The persistent decline in the purchasing power also can be termed as inflation. Both the above things may occur due to increase in currency circulation without increase in the quantity of products. The availability of currency outsmarts the availability of goods and services. In other terms the inflation is termed as consequence and not a cause for increase of price or currency circulation. The inflation may change from one year to the other. It works year after year without a gap. This increase will compounds on top of the previous years. As the prices affect different people differently, the inflation can be measured in various ways. One of the most used index or measure is consumer price index known as CPI. Consumer price index is the result of survey of changes of prices of goods and services over a period. This period may be months or years according to our consideration. Four hundred select items are indicated in CPI that range from groceries to housing. This determines purchasing power of consumer and in turn the value of money. This value of money decides the quantity of goods the consumers can get with currency available with them. The consumers can maintain present standards of living if income rises at the same rate as inflation. If the rise of income levels are more than the inflation levels that is if the availability of goods increase more than the price level, the standard of living increases. The standard of living decreases if the inflation rises more than the rise of levels of income. This is due to decrease of availability of goods without reasonable levels of rise of income. If the income received is not able to counter the rising prices the standard of living decreases with the increase of inflation. 2. Hospitality Industry- With an area spread of 7,617,930 square kilometers; Australia’s hospitality industry is a 3.5 trillion dollar service sector and covers a diverse range of establishments providing hospitality services in the form of accommodation, meals and drinks. In Australia tourism forms a large sector of the economy. The industry represented 3.9% of Australia's GDP in 2003/04. Tourism contributes 4.2 per cent of Australia’s GDP and is an important export industry, making up 11 per cent of exports. It is also an import component of regional economies, and is employment intensive, accounting for 5.7 per cent of total employment. Some of the popular destinations for tourism include Sydney, Melbourne, Brisbane, Gold Coast, New South Wales, Perth, Sunshine Coast and Queensland. While the most popular activities includes Dining or eating out at a café, shopping, beach, markets, national parks, pubs, clubs and discos, zoos, wildlife parks and aquariums, botanical gardens and public parks, charter boats, ferries, cruises and visiting historical sites and heritage. Australia has tourists mainly from New Zealand, Japan, United Kingdom, United States, China, South Korea, Singapore, Malaysia, Hong Kong and Germany. Japanese tourists make up a distinctive part of the Australian tourism market, usually taking short package tours. Australians are big domestic travelers as well, with a profusion of seaside resort towns in every state, mountain retreats, plentiful national parks, rivers, fishing locations, wine growing regions, as well as domestic visitation of the major tourist spots. There are industries affected by direct tourism demand in Australia. They are transport, accommodation, cafes, restaurants, take away food outlets and other retail trade. Tourism has a capability of affecting the wide range of other industries. The purchase of meals by tourists will increase the demand in food manufacturing. To manufacture meal, the transportation and electricity industries are also involved. In this manner the tourism draws on services offered by Australian Government. The state, territory and local government organizations are involved in these services. These organizations are involved in construction and maintenance of roads, airports, harbors, railways, national parks, tourism promotion, immigration and customs services, information services and the recreational facilities. This can contribute to industries like travel agencies also. The accommodation, air and water transport industries too are involved. The vehicle hire like taxis, cafes and restaurants, and take away food outlets are affected. 2. Economy- Australian economy is considered as strong. This is competitive, open, vibrant and flexible. It is commended by international organizations like IMF. This commendation is about the sound macro economic management and continuing structural reform efforts. In the last 15 years, the standard of living in Australia has been increased substantially indicating the decrease in the level of inflation. This is due to strong economic growth associated with low inflation. The low inflation has spurred the growth. The following index lists the data clearly- Table 1 Capital Hospitality Index GDP Growth 3 % GDP/Capita $32,000 Trade Balance $-16.6 billion Population 20.1 million Unemployment 5% The per capita GDP is on par with the dominant west European economies. This is due to enviable western style capitalist economy. The business and consumer confidence can be termed as the causes for growth along with high export prices for raw materials. The agricultural products’ surplus also is fuelling the economy. The factors like emphasis on reforms, low inflation, growing ties with china are reasons for the strength of the economy. In the recent years strong demand associated with drought increased the trade deficit. Though the trade balance improved in 2006, the housing prices peaked in 2005. This is capable of diminishing the prospect of rates. In turn the interest rates may be raised to prevent a speculative trouble. The conservativeness in the policies is reason for Australian budget since 2002. The institutional structure of Australia is sound, stable and modern. This atmosphere will give stability to businesses and makes the country good destination for investment. The corporate governance system is transparent. This involves the business oriented corporate regulation and insolvency regimes. According to World Bank the country is the second easiest economy to start a business. Any business can be established in 2 days when compared to 20 days in OECD countries. Getting credit for the business also is easy in Australia. The Goods and services tax, value added tax is levied at 10 percent. This is applied to almost all the goods and services. The main risks to the economy are unexpected fall in commodity prices, a drop in housing prices, a resurgence of inflation or a continuation of the drought that is constraining agricultural output. Inflationary pressures persist, with capacity utilization rates still high and the labor market remaining tight, but inflation is expected to remain within the 2-3% range targeted by the Reserve Bank of Australia (the central bank) in the forecast period. The Australian dollar is expected to depreciate against the US dollar in 2008-11, owing to falling interest rates and commodity prices. Table 2 Australian Economic Data Key indicators 2006 2007 2008 2009 2010 2011 Real GDP growth (%) 2.7 3.6 3.0 2.9 2.9 2.7 Consumer price inflation (av; %) 3.5 2.5 2.9 2.6 2.5 2.3 Budget balance (% of GDP) 1.5 1.3 1.1 0.9 1.0 1.2 Current-account balance (% of GDP) -5.4 -5.6 -5.4 -5.5 -5.5 -5.0 Deposit rate (av; %) 4.0 4.8 4.6 4.3 4.2 4.1 Exchange rate A$:US$ (av) 1.33 1.20 1.28 1.39 1.50 1.52 Exchange rate A$:¥100 (av) 1.14 1.02 1.34 1.43 1.52 1.52 4. Effects of Inflation on industry- An area of immediate concern for hospitality industry is the effect of inflation on travel. The impact of higher inflation on consumer spending and travel could adversely impact the lodging business. The hospitality industry is cyclical; dictated by the fluctuations that occur with an economy every year. Government policies in areas such as taxation have a neutral impact on the nation's tourism industry. The price competitiveness of tourism is an important determinant of inbound visitor numbers. Price competitiveness indices can be used to explore questions of how a destination changes in this respect over time and the causes of any changes. The inflation has been expected to rise due to year long rise in energy prices in last year. Even the consumer price indexes along with the bond market have shown mixed signals. This resulted in uncertainty to the inflation outlook. The higher fuel costs have been expressed as a cause for rising the travel costs of business to 12 percent this year. This is according to the management consulting firm Runzheimer international. In travel segment it is perceived that the consumer is in a declining position to spend on discretionary items like travel. This perception is capable of showing negative impact regarding lodging of fundamentals. It was calculated that the cost of the produce which is $100 in 1983 is $182.35 in 2003. This is an example for rise of inflation in the course of time. The cash register used to cost $500 in 1993 and the same is $640 in this year. All these are examples for rise of inflation. These figures indicate that the increase of costs for the items is the reason for the exact pace with the rate of inflation. Actually the inflated price can be higher or lower than the price calculated. Not only these things, the costs for running the restaurant also are rising steadily. These also are within the annual inflation rate. The failure to adjust the prices to reflect the trends in inflation, the economy has effectively lowered them. It is difficult to notice the short term effects but in the longer term, the consequences are not avoidable. There is a chance for erosion of profits and the ability to attract employees by paying them. This results the business entering into a destructive decline. Acknowledgement Every effort has been made to trace rights holders, but if any have been inadvertently overlooked the publishers would be pleased to make the necessary arrangements at the first opportunity. Table of Contents Executive Summary…………………………………………………… 2 Acknowledgement………………………………………………………8 Table of Contents……………………………………………………… 9 List of Tables……………………………………………………………10 List of Figures…………………………………………………………...11 How Inflation Affects Australia’s Hospitality Industry………….……12 Updated literature review ……………………………………………..15 Methodology…………………………………………………………... 16 Discussion ……………………………………………………………...22 Conclusion ……………………………………………………………...23 References ……………………………………………………………...24 Appendices…………………………………………………………….. 26 List of Tables Table 1: Capital Hospitality Index…………… 4 Table 2: Australian Economic Data…………. 6 List of Figures Figure 1: Inflation Rate Calculator……………………………………..17 Figure 2 Australia: Inflation (year-over-year) …………………………20 Figure 3: Consumer Price Index June Quarter………………………..21 How Inflation Affects Australia’s Hospitality Industry Snapshot of the Australian Hospitality Industry Hospitality and leisure operations across Australia have experienced phenomenal growth over the past few decades. This growth can be attributed to globalization, deregulation, increased household disposable income, and technological advancements. Australia witnessed a solid growth in the hospitality sector in the past few years. International visitors to September 2006 were reported to be much over the previous year, with a substantial growth in Chinese visitors being one of the contributing factors. Increased relations between China and Australia are expected to strengthen this. The Commonwealth Games held in Melbourne in March 2006, brought a near term lift for the hospitality sector. It attracted 40,000 international visitors to the city. It also fostered domestic travel. In terms of supply there are a minimal number of hotels in the pipeline. The reopening of the Sydney Hilton in mid 2005following a major refurbishment has been the only significant addition to hotel room numbers. The hotel sector has been dealing with a rise in serviced apartments, particularly in Sydney and Melbourne, following a decline in the inner city residential apartment market, which left some developers looking for alternative uses for unsold developments. Thus the hospitality industry is significantly growing, widening and deepening. The hotel market in Australia is moving from strength to strength. This is because the hotels in the country have posted reasonable growth in first nine months of any year just with the exception of Olympic year. The revenue available per room is $116 and this is just $2 behind the height achieved in 2000. The analysis cannot be stopped here. Australia’s tourism forecasting committee (TFC) announced plans to almost double its number of international arrivals within the next nine years. The international arrivals are growing at a rate of 5.6 percent. This is expected to touch 9 millions by 2014. This is capable to boost the value of inbound tourism to $32.1 billion. As the growth forecast is 6.4 percent, this may not seem aggressive. The hospitality industry in Australia is attracting many business people. They are willing to sell their overseas businesses and want to set businesses in Australia. This is due to the availability of local produce, sunshine, seafood, and wine. There are 28,900 restaurant businesses in Australia. They employ 14,079 workers. This is equal to 1.08 million restaurant seats and 560 million meals served per year. An average Australian restaurant is having a turnover of $533,200 per annum. Each business will employ a working proprietor, 9 staff, 1 chef, 1 cook, 1-2 kitchen hands, 4-5 waiting staff and can make a profit of 4 percent according to restaurant association of Australia. The charges are $1.80 in Victoria, $2.44 in New south Wales, $23.2 in Western Australia, $3 in South Australia, $1.77 in Federal Government. As there is increase of expenses, the increase in price per meal for the consumer is inevitable. On an average each Australian will eat out 1.8 times a week and 90 times per year. This resulted in increase of fusion cuisine. The recruitment of overseas chefs is possible with the discussions between restaurant and catering association and government. This involves the trade qualified cooks recruitment also. With this agreement the restaurant owners and hotel managers can arrange for permanent temporary business visas for international staff. The in house training schemes are needed for relevance of training delivery. The industry bodies, education and training providers have work regarding development of competency based training and new apprenticeship schemes. This is due to the expected bright future for Australian industry. Recently TFC provided good indicators of the growth opportunities. They exist more in tourism sector. As tourism Australia is trying for new deal with Qantas, the new services are added to both domestic and international airline routes. This is due to the expectation of rise in number of visitors and can be termed as a good news for Australian hotel industry. Updated literature review Table 1: Capital Hospitality Index, Retrieved August 30, 2007, from the World Wide Web http://www.forbes.com/lists/2006/6/CHI007.html Hospitality Industry in Australia, Retrieved Aug 30, 2007, from the World Wide Web http://www.the-ice.org/expertise/industry/tourism_australia/26.aspx A Snapshot of the Australian Hospitality Industry Today, Retrieved Aug 30, 2007, from the World Wide Web http://www.4hoteliers.com/4hots_fshw.php?mwi=1173 Table 2 Australian Economic Data, Retrieved Aug 30, 2007, from the World Wide Web http://www.economist.com/countries/Australia/profile.cfm?folder=Profile%2DEconomic%20Data Methodology The demand for hospitality and tourism is subject to a host of uncontrollable factors. These factors are difficult to measure and project. Despite this fact the tourism industry of Australia, including private and public sector operators, needs scientifically accepted projection bases. These help make investment and other strategic decisions. The approach, methodology and techniques used in the research are relevant to researchers internationally and the recommendations are useful for national tourism policy and strategy formulation in any geographical context. These measures include the following- Measuring inflation Comparing one period's price statistics with some other period's, like the previous month, the previous year, or a designated base period, gives a crude measure of inflation (if the general level of prices has risen) or deflation (if it has fallen). But these measures do not discriminate between relative price changes and inflation, so an increase in the price of a single item, such as energy, may cause a price index to rise. For this reason, many measures of "core" inflation have been developed from the basic price indexes, such as the CPI excluding food and energy, the median CPI, or the core PCE. The inflation rate is measured by changes in Consumer Price Index (CPI). The headline inflation rate can be calculated using the following relationships. Figure1 Inflation Rate Calculator The Office for National Statistics produces a number of measures of inflation covering consumer prices, producer prices and corporate services prices. Consumer Prices Index (CPI) The consumer prices index is a macro economic measure. This is regarding the consumer price inflation and is basis for the inflation target of Government. This target is according to the monetary policy committee of Bank of England. The development of consumer price index is according to internationally agreed rules and is known as HICP out of the country. This is the preferred measure for international comparisons of inflation. Similar to RPI the CPI also measures the average change from month to month in prices of consumer goods and services. This differs in particular households. This also represents the range of goods and services included and the method the index is constructed. Retail Prices Index (RPI) This is most familiar general purpose domestic measure. This is the measure of inflation in UK and is continuously available from June 1947. The average change from month to month is measured. This measure is about the prices of goods and services purchased by majority of house holds in United Kingdom. The retail price index and its derivatives are used by Australian Government to update the pensions and benefits and gilts of index linked ones. Harmonized Index of Consumer Prices (HICP) The RPI is known as CPI in UK. The statistics of Euro publishes the measure with the name of UK HICP. This is launched in 1997 according to the need for Europe wide comparable measure of inflation. This is according to Maastricht treaty. This will measure the inflation every month in European monetary Area taking it as a whole. The measures and compares inflation of each member state. Producer Price Index (PPI) This is a monthly survey. This measure the price changes of goods bought and sold by UK manufacturers. Some times the output price index is referred as factory gate prices. This measures prices of goods sold by UK manufacturers. This is an input index and can measure the prices of materials and fuel bought by UK manufacturers. In addition to this the export and import price indices are also available. Services Producer Price Index (SPPI) This is a quarterly survey of prices. The prices charged for services provided by UK businesses to other UK businesses and government are measures. The industry specific series covers the half the total corporate services sector. These are currently published on experimental basis. This status means that the indices are still under development. There is a probability for revision. This is because the price indices for industry are not covered till now. The services like computer services are under development and are being added progressively to the published series. Causes of inflation It may be caused by an increase in the volume of paper money issued or of gold mined, or a relative increase in expenditures as when the supply of goods fails to meet the demand. Inflation is a cause rather than an effect. Two theories as to the cause of inflation are demand-pull inflation and cost-push inflation. 1. Demand inflation or demand-pull inflation- This is due to the inflation caused by increases in aggregate demand due to increased private and government expenditure. In the period between June 2001 and June 2001 the lower interest rates and higher consumer and business confidence saw household consumption increase by 4.5 percent. This caused a business investment rise by 15.8 percent. This also increased the imports by 11.9 percent. The reserve bank of Australia taking into consideration the strong domestic demand increased the interest rates in June 2002. This action is taken to reduce the inflationary pressures. This is because the government expenditure on goods and services or tax cuts can increase the demand and the rate of inflation. 3. Cost-push inflation- This is currently termed as supply shock inflation. The cost push inflation results from increases in costs of production. To measure the increases in wages the wage cost index can be a good measure. This affects the imported inflation rates when the price of imported goods from other countries increases. For example, the petrol and diesel prices will increase in Australia if international suppliers reduce production to increase prices or to avoid fallout. The third type of inflation also can be considered. This is built in inflation that reflects the events in the past. This can be termed as hangover inflation. This is due to adaptive expectations and will be linked to price/wage spiral. This involves the workers trying to keep their wages up with the prices. This results in employers passing the higher costs to consumers and this is a vicious circle. Recent trends in inflation The inflation rate is averaged 6 percent overall in 2000/01. The increase in domestic petrol prices due to increase in international crude oil prices increased CPI by 1 percent. Figure 2 Australia: Inflation (year-over-year) (1/01/2006 - 01/01/2007) Frequency: Monthly Magnitude: Percent Source- http://www.clevelandfed.org/research/Inflation/World-Inflation/index.cfm#chart Figure 3 Consumer Price Index June quarter 2001 to June quarter 2002 Source: ABS Catalogue 6401.0, June 2002 The CPI (headline inflation rate) rose by 2.8% for the year June 2001 to June 2002. Discussion Owing to anticipated high tourism market growth rates, the Australian tourism industry is expected to develop substantially over the next five years. However the earnings from hospitality industry tend to be better when the value of the Australian dollar is appreciated. The inflation can cause problems in economy, when it is high. 1. The higher prices will affect the people of fixed incomes like pensioners, students etc. This will be worse in real terms and lead to the reduction in purchasing power. This even affects the GDP of the country due to decrease of expenditure. 2. The increase in inflation prompts the trade unions to demand higher wages. They demand that the wages should be adjusted to keep up with the inflation. The collective bargaining of the employees results in setting of wages according to the price expectations. This drives the inflation further causing a wage spiral. In this backdrop the strikes can cause the decrease in productivity resulting in decrease of GDP. 3. The exports of the country having higher inflation will be costly if it maintains fixed exchange rates with other countries. This creates a deficit in current account. The strong economic growth of Australia has been coupled with low inflation. The efficient use of resources also is a cause for growth and lowering of inflation. This trend can help hospitality industry in Australia. This provides the robust growth in future. The global economic and business issues also will show their effect on the sustainability of hospitality growth in Australia. Conclusion To conclude we can say that inflation does have a significant impact on Australian hospitality industry. Our study reveals that low inflation rate is congenial to the industry and it greatly benefited with low inflation rate and vise versa. Low inflation rate increases the consumer purchasing power. More money with the people with comparatively lesser costs promotes them to buy more as well as use more of the services as hotels, restaurants and cafes. Hotel developers also have more to spend on infrastructure and other developmental activities thereby helping build abundant facilities. This helps in attracting more domestic and international tourists thus giving a boost to the hospitality sector. Also in the event of trade fairs, exhibitions, International games held in Australia, increasing purchasing power helps people spend more on these events. These events are the hallmark of boosting tourism and hospitality to a great extent. Thus all in all inflation does affect hospitality significantly. References 1. Inflation, From Wikipedia, the free encyclopedia (Electronic version). Retrieved September 19, 2007, from http://en.wikipedia.org/wiki/Inflation 2. Hospitality Industry, Wikipedia, the free encyclopedia (Electronic version). 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It will also help find solutions to contemporary and emerging problems in areas such as the environment, health and national security. It is well documented that the Hospitality Industry is expanding worldwide and figures show that by the year 2005 the industry will employ more than 200 million workers. The International hotel Industry is facing an extreme shortage of talented, competent, well trained and experienced management staff. Read More