I am also Asian, and I have European in-laws. Originally I found myself faced by a similar dilemma--I am used to the idea of taking care of my parents as part of the social contract, because they raised me and sacrificed for me. However, in the European-based society (including the US), it's often okay to let the parents, even the in-laws, take care of you. In some way, it is a source of pride for them to be able to take care of you "kids". My guess is that they didn't have a great struggle, and perhaps they have enough cash to want to enjoy their vacation.
I would suggest trying to be frugal for yourself, but let them spend what they want. It doesn't mean you have to as well. Just make sure you order conservatively at restaurants and pick a conservative room as you travel. That way it doesn't look like "mooching". Many places you will be able to pay for your own food separately. In restaurants, offer to pay for yourself and your fiancee. They may take you up sometimes, and other times they may not. I'm guessing they won't likely have you to pay for the whole group. I doubt they plan to stick you with their big bill from the description you gave. They seem like nice people. And of course, most older people don't want to stay in a hostel. That is perfectly normal. Relax.
If they pick a place to stay out of your price range, simply say that you'd prefer to be more cost-conscious for your own budget, and you'll meet them in the morning. If this will create lots of extra driving for them, I suggest you stay in the same place as they are. And don't forget, you'll be saving a lot on the car, since they are driving. So don't try to be a complete cheapskate, it will simply create unnecessary tension. If they're going to be your in-laws, it's a good idea to try explain to them that you're trying to be financially responsible for your joint future together. I'm sure they'd understand that.