Could fewer foreign visitors help ease U.S. inflation?

Investing.com -- A decline in inbound tourism may help cool U.S. inflation by dampening demand in key services sectors, according to analysts at Capital Economics.

U.S. inbound travel is still about 15% below pre-pandemic levels. Analysts said this drop in foreign visitors is holding back price growth in sectors like accommodation, food services, and entertainment, where overseas tourists tend to spend heavily.

Travel services inflation has slowed more sharply in the U.S. than in other advanced economies, the report said, adding that the gap partly reflects the weaker recovery in foreign tourism. Spending by international visitors accounted for nearly a third of travel services exports before the pandemic.

The analysts said that fewer tourists may be “a blessing in disguise” for the Federal Reserve, which has struggled to bring inflation back to its 2% target. Service-sector inflation has been particularly sticky, with domestic demand strong and labor costs elevated.

While weaker tourism weighs on certain sectors, Capital Economics suggested the overall impact on GDP is modest. Employment in tourism-related industries has already recovered, and domestic travel demand remains robust. But the shortfall in foreign spending may be helping ease pressure on prices.

If foreign travel to the U.S. had recovered more fully, it is possible that inflation would now be slightly higher, as per the analysts.

With global travel continuing to normalize, the firm cautioned that a rebound in inbound tourism could revive price pressures. For now, though, the lingering deficit in international visitors is contributing to a more favorable inflation outlook for U.S. policymakers.

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