The use of CPI for tourism prices in demand modelling

The non-fare components or tourism prices are often proxied by consumer price indices (CPI) in tourism demand models. The argument for this is that tourism prices move in close concert with general consumer prices. It is not immediately obvious that this is true, as tourist spending differs from general consumer spending. This paper investigates the evidence for the use of CPI for tourism prices, employing a variety of methods and data. For 10 important tourist destinations price series for major tourist expenditure items were estimated. These were found, with a few exceptions, to correlate very highly with the destination's CPI. The high correlations persisted even after linear time-trend effects were removed from the series. In the case of Australia detailed data on tourist origins, numbers, spending breakdowns and on price changes were used to derive sound tourism price indices for major origins of tourists to Australia. The tourism price series were found to correlate very highly with the Australian CPI. The results confirm that it is reasonable to use CPI as a proxy for tourism prices in demand models. However, interpretation of the estimated coefficient is problematical.