How Rising Inflation Affects Art Galleries

US consumer goods prices hit a staggering 7% annual increase this week, marking the fastest rate of inflation in four decades. The precipitous rise in food, fuel and energy costs along with more bewildering factors including rent and wages over the past 12 months suggest that the upward trend may not turn out to be true. transient, as the supply chain is disrupted, high demand and increasing consumer spending, among others. factors – continue to erode the purchasing power of the dollar.

What implications, if any, could this indicate for the art market?

While an exact correlation between the art market and inflation is difficult to analyze, as art is a sentiment driven asset of excess wealth, history suggests that the price of art sold auction tends to increase during times of high inflation. However, the direct effects of inflation on the pricing of works sold on the primary market are generally even less quantifiable.

The current surge in inflation comes as we see auction records and frantic selling rates in the primary market. Such conditions can be attributed to a cocktail of contributing factors, including the rapid creation of new high net worth investors, low interest rates, increased digital sales, and greater than supply demand.

For the most part, the circumstances which currently influence the art market are atypical, leaving ample room for speculation.

Madeleine D’Angelo is the founder and CEO of Arthena, a financial technology company that uses quantitative pricing methodologies to execute financial strategies and products in the art market. She explained that although primary market data is not as strong as auction market data due to a lesser degree of price transparency, Arthena has created a variety of indices that integrate results from both markets. to understand the correlation between art and other asset classes, including an overview of the performance of art during times of inflation.

“What we’re seeing in the primary market right now is there’s a rush and people are just looking for inventory,” D’Angelo said. “They pay the market price for the parts they buy, because they’re just happy to get those parts. She said the current trend suggests irrationality in buyer behavior, especially with regard to the astronomical prices achieved for several emerging artists, making data analysis difficult to quantify. Ultimately, however, she surmised that “as long as very high net worth investors continue to grow in both size and volume, I think they will continue to pump money into the equity market. ‘art. I don’t think this trend is going to stop anytime soon. And I think for primary sales that means people are happy to buy at the top of the market to get inventory.

With a frenzy of new money entering the primary market and an ever-increasing number of new collectors, gallery owners are in a hurry to protect and ensure stable market growth for their artists. Selling an artist’s work at too high a price upfront could create a bubble and be detrimental to the artist’s market across the board. For established galleries representing prominent artists, nurturing relationships with long-standing clients is an additional factor that far outweighs a quick short-term profit.

“The auction phenomenon appears, at its root, to be driven by the fact that the wealthy have even more disposable income to drive price hikes for in-demand artists, rather than directly reflecting the basic economy of the country. inflation felt by most Americans, ”said Marianne Boesky. , founder of the Marianne Boesky Gallery in New York. “As long as this fact remains, the primary price structures created and managed by galleries do not fluctuate according to supply and demand. We generally want the primary prices to correlate with the career path of each artist.

Boesky continued, “A demand-driven market doesn’t mean much to the prices of works of art in the primary market if we are to keep a cool head. “

However, as with many businesses, inflation impacts a gallery’s daily operating costs. Boesky added that “the word inflation came up at our last staff meeting for the first time I can remember in 25 years … The hard facts are that the costs of artists’ equipment have gone up, the costs of transporting works of art have gone up. As art has gone up, the cost of every link in our business chain, from the art supply store to delivering a work to the customer, has gone up. To account for this, the gallery is in talks to potentially implement a 10% price hike across the board, which would be “virtually, if not entirely imperceptible,” Boesky said, and it wouldn’t be bit by bit. near to the same scale as the record prices seen in other areas of the market.

“Prices are skyrocketing – prices for materials to crate works of art, prices for moving works of art, prices for transport, prices for shipping – everything is significantly higher,” said Sean Kelly, founder of the Sean Kelly Gallery in New York. . “So we have two options: pay the price for the work, or suck it up and take care of it – that’s what we’re doing. He explained that in his 30 years of experience, it is imperative to take a long-term approach to economic fluctuations.
Supply chain issues have impacted galleries in other ways as well. “We have certainly experienced delays in the production of artist studios,” said Tina Kim, founder of the Tina Kim Gallery in New York City. “From canvas stretcher bars to raw materials for sculpture, there have been serious delays in the delivery of goods. Shipping was difficult and crowded, and we took important steps to plan art fairs and exhibitions.

Kim continued, “Regardless of inflation, I have experienced a high demand for works, and this has contributed to an increase in the prices of our artists. It has been difficult to secure stocks as demand increases. Our customer base has grown significantly since the onset of COVID-19, and we have undergone a significant restructuring within the gallery to accommodate our online sales and inquiries. She explained that the price increases were calculated in order to keep the market growing steadily. “You have to be very careful when raising artist prices,” Kim said. “Considering the international nature of the market, since we work with a large audience, I feel comfortable with the pricing and I think what I have defined is healthy. “

However, the prices of works by emerging artists seen in other areas of the primary market suggest that not all dealers take such precautionary measures. While increased demand coupled with limited supply supports a bull market poised for continued growth, if prices, especially for emerging artists, skyrocket too quickly, their market value could drop upon reaching the market. secondary.

Commenting on the prices and sale rates of young artists recently seen at major art fairs such as Art Basel in Miami Beach, Kelly warned that such speculative valuations could prove to be unsustainable, and “people who push prices can lose money, while the artists they performed or speculated on are going to be seriously damaged.

He said: “We don’t push the prices of our young artists through the roof… we don’t create bubbles, we don’t speculate. Kelly explained that these practices can be “really potentially counterproductive” for all parties involved.

So how can collectors best navigate today’s market?

While the purchase of art can certainly prove to be financially viable in the long run and beat inflation, it is vital for new collectors to make informed decisions about the works they acquire, rather than to adhere to the works. trends.

“It’s always dangerous to buy art while speculating, and it’s important not to get carried away by the excitement,” Kim said. “I think if you follow the money you can easily make mistakes. Collecting art is a real passion and a real way of life. There is good, exciting art at all price points. It is not something to invest your savings in; I would never advise anyone to invest in art. With the right careful selection, you can live with the works you love, and your value in art will continue to increase.

Sibylle Rochat, founder and director of London-based art consultancy Rochat Art Consultancy, stressed that “quality is king” – especially in a bullish art market, as we are now seeing – and collectors should be wary of jumping on trends without doing so. the research.

“Right now everything and anything is selling,” Rochat said. “So when a correction comes in, all the works that are not of high quality are gone. She explained that the art market goes through cycles and some works will go out of style during a recession, driving prices down dramatically.

While the current circumstances surrounding the art market are unique and the trajectory of economic factors remains to be seen, it is important to remember that the art market will always experience cycles. “During times of recession, even the wealthiest people are psychologically affected by their paper losses, and they tend to cut back on their spending on collectibles,” Boesky said. “These times see collectors spending less, but not selling their excellent material in a soggy market. If they can afford to keep the art they love, they do.

While the prospects for rising inflation rates and their effects are unclear, ultimately building an art collection rests on the same principles: buy what you love, do your research, and avoid getting caught up in trends.

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