I had a somewhat jolting experience the other day. I went to my local post office to mail a letter via Priority Mail. Priority Mail was a perfect choice for this letter. In addition to ensuring fast delivery, U.S. Postal Service Priority Mail also allows for tracking. And although I hadn’t sent anything Priority Mail for quite a while, I expected the price to be reasonable – a few dollars perhaps.
My price expectations were not realistic. When the clerk told me the total was $6.45, I had sticker shock. It seemed to me as if Priority Mail was far more expensive than I had remembered it being in the past. I was mailing a normal, standard-sized letter. At the time, a first class stamp only cost $0.47. Why the huge disparity in price?
So I did a little research. I compared the change in Priority Mail rates between 2006 and 2016. Over this ten year period, the base price of Priority Mail increased from $4.05 to $6.45. This is an average rate increase of 4.76% per annum. I then compared this to the U.S. CPI inflation index over the same period. It had only increased by 1.82% annually. So the price of the U.S. Postal Service’s Priority Mail had escalated at an almost 3% faster pace than inflation every year for the last decade.
Then it hit me. This is a classic example of what is known in economics as “creeping inflation”. Creeping inflation is defined as a situation where the price of a particular good or service gradually, but inevitably, ratchets upwards over time. Although none of the price increases seem excessively large in isolation, after accumulating for long enough, they ultimately result in major inflation.
Unfortunately, there are several areas of the U.S. economy that have been experiencing the corrosive effects of creeping inflation. Health care and education are two prime examples. Prices in these sectors have reliably exceeded the general inflation rate for decades now. As a result, they are becoming unaffordable for average people.
Perhaps surprisingly, the art and antiques market are another part of the economy that has experienced creeping inflation for the past 10 to 15 years. A broad range of investment grade art and antiques have seen this phenomenon. Ancient and medieval coins, vintage mechanical wristwatches, antique jade carvings, estate jewelry and vintage prints are just a few of the categories that have radically increased in price over the last decade.
In fact, most investment grade art and antique prices have generally risen by a factor of two to four over the last 10 to 15 years. This equates to an annualized appreciation rate of anywhere from 4.73% to 14.87%. This creeping – and occasionally galloping – inflation in the fine art world has important implications for both collectors and investors alike.
On the one hand, it means that art has proven to be a great investment for connoisseurs over the last several years. The returns for investment grade art and antiques have equaled, and, in some instances, handily exceeded those from traditional financial assets. And carefully chosen, high quality art will probably continue to be a very good investment for many more years to come.
However, one negative aspect of creeping inflation is that investment quality art and antiques are becoming ever less affordable to the average collector. Now this isn’t an issue yet for lower priced antiques. For example, an investment worthy piece that traded for $50 in the mid 2000s might cost $125 in 2016. The current cost still won’t break the bank, but the happy days of picking up a couple nice pieces for a single hundred dollar bill are long past. In addition, as prices continue to escalate due to creeping inflation, even today’s bargains will eventually pull out of reach.
If you are interesting in fine art or antiques as alternative assets, it is important to act now. The prices of these overlooked investments have appreciated faster than the rate of inflation for well over a decade. Investment grade antiques that used to be plentiful and inexpensive are becoming progressively rarer and more expensive. Creeping inflation will eventually price many unwary investors out of the fine art market.
