How Soaring 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. Skyrocketing food, fuel and energy costs, along with more disconcerting factors including rent and wages over the past 12 months, suggest the upward trend may not continue. turn out to be transitory, as the supply chain is disrupted, high demand and increased consumer spending, among others. factors – continue to erode the purchasing power of the dollar.

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

Although an exact correlation between the art market and inflation is difficult to analyze, as art is a sentiment-based asset tied to excess wealth, history suggests that the price of art sold at auction tends to rise during periods of high inflation. However, the direct effects of inflation on the price of works sold on the primary market are generally even less quantifiable.

The current spike in inflation comes as we witness auction records and runaway selling rates in the primary market. These conditions can be attributed to a cocktail of contributing factors, including the rapid influx of new super-wealthy investors, low interest rates, increased digital sales, and demand outstripping supply.

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

Madeleine D’Angelo is the founder and CEO of Arthena, a fintech company that relies on quantitative pricing methodologies to execute financial strategies and products in the art market. She explained that while primary market data is not as robust as auction market data due to a lesser degree of price transparency, Arthena has created a variety of indices that integrate the results of both markets to understand the correlation between art and other asset classes, including insight into how art performs during periods of inflation.

“What we’re seeing right now in the primary market is that there’s a scramble and people are just looking for stocks,” D’Angelo said. “They pay market prices for the coins they acquire because they are just happy to acquire those coins.” She indicated that the current trend suggests irrationality in buyer behavior, particularly in terms of astronomical prices obtained for several emerging artists, making data analysis difficult to quantify. Ultimately, however, she surmised that “as long as super-wealthy investors continue to grow in size and volume, I think they will continue to pump money into the art market. 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 the inventory.

With a frenzy of new money entering the primary market and an ever-increasing number of new collectors, gallery owners are pressured 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 prove detrimental to the artist’s market down the line. For established galleries representing top-notch artists, nurturing relationships with long-standing clients is an additional factor that far outweighs making a quick short-term profit.

“The phenomenon of auctions seems, at its core, to be driven by the fact that the wealthy still have more disposable income to drive price increases for artists in demand, rather than directly reflecting the basic economics of inflation felt by most Americans,” said Marianne Boesky. , founder of the Marianne Boesky Gallery in New York. “While this fact remains, the main pricing structures created and managed by galleries do not fluctuate with supply and demand. We generally want the main prizes to correlate with each artist’s career trajectory. »

Boesky continued, “A demand-driven market doesn’t mean much to primary market art prices if we’re going to keep a cool head.”

However, as is the case with many businesses, inflation has an impact on a gallery’s day-to-day operating costs. Boesky added that “the word inflation came up at our last staff meeting for the first time, I remember well, in 25 years… The bare facts are that artists’ material costs have gone up, the transportation costs of works of art have increased, the cost of each link in the chain of our business, from the art supply store to the delivery of a work to the customer, has increased. To accommodate this, the gallery is in talks to potentially implement a 10% price increase across the board — which would be “virtually, if not entirely unnoticeable,” Boesky said, and it wouldn’t be little. nearly on par with the record prices seen in other market sectors.

“Prices are skyrocketing – material prices for crating artwork, moving artwork prices, transportation prices, shipping prices – everything is significantly higher” , said Sean Kelly, founder of the Sean Kelly Gallery in New York. . “So we have two options: Jack the price of the job, or suck it up and deal with it – that’s what we do.” 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 also had other impacts on galleries. “We have certainly experienced delays in production from artist studios,” said Tina Kim, founder of the Tina Kim Gallery in New York. “From canvas stretcher bars to sculpture raw materials, there have been serious delays in the delivery of goods. The expedition was difficult and crowded, and we went to great lengths to plan art fairs and exhibitions.

Kim continued, “Regardless of inflation, I’ve seen strong demand for work, and that’s factored in an increase in prices from our artists. It has been difficult to secure stocks with the increase in demand. Our client base has grown significantly since the onset of COVID-19, and we have undergone significant restructuring within the gallery to accommodate our online sales and enquiries. She explained that the price increases were calculated to maintain steady market growth. “You have to be very careful when raising artists’ prices,” Kim said. “Given the international nature of the market, since we work with a large audience, I feel confident with the prices and believe that what I have defined is sound.”

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

Commenting on prices and sales rates for young artists recently seen at major art fairs such as Art Basel in Miami Beach, Kelly warned that such speculatively based valuations could prove unsustainable, and “people who push prices can lose money, while the artists they were betting or speculating on are going to be really 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 buying 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 following trends. .

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

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 currently seeing – and that collectors should be wary of jumping on trends without doing the research.

“Right now, anything and everything is selling out,” Rochat said. “So when a fix comes, all the works that aren’t of high quality disappear.” She explained that the art market goes through cycles and some works will go out of style during recessionary times, driving the price down significantly.

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 go through cycles. “During recessions, even the wealthiest people are psychologically affected by their paper losses, and they tend to retreat from spending on collectibles,” Boesky said. “These periods 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 outlook for rising inflation rates and its effects are unclear, building an art collection ultimately relies on the same principles as ever: buy what you like, do your research and avoid getting carried away by trends.

Mildred D. Field