How Surging Inflation Is Impacting Art Galleries
Andy Warhol, installation view of 200 One Dollar Bills, 1962. Photo by Emmanuel Dunand/AFP. Image via Getty Images.
The prices of U.S. consumer goods hit a staggering 7% annual increase this week, marking the fastest rate of inflation in four decades. The precipitous rise in costs of food, fuel, and energy alongside more disconcerting factors including rent and wages over the past 12 months suggests that the trend upwards may not prove transitory, as supply chain upsets, high demand, and increased consumer spending—among other 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 parse, as art is a sentiment-driven asset tied to surplus wealth, history suggests that the price of art sold at auction does tend to increase during periods of high inflation. However, inflation’s direct effects on the pricing of work sold on the primary market are typically even less quantifiable.
The current surge in inflation comes as we witness record highs at auction and rampant sell-through rates across the primary market. Such conditions can be attributed to a cocktail of contributing factors, including the rapid minting of new ultra-high-net-worth investors, low interest rates, an increase in digital sales, and demand that outweighs supply.
Essentially, the circumstances influencing the art market at present are atypical, leaving ample room for speculation.
Madeleine D’Angelo is the founder and CEO of Arthena, a financial technology firm that leverages quantitative-driven pricing methodologies to execute strategies and financial products within the art market. She explained that while primary-market data is not as robust as auction market data due to a lesser degree of pricing transparency, Arthena has created a variety of indices that incorporate both markets’ results to understand the correlation between art and other asset classes, including insights on how art performs during periods of inflation.
“What we’re seeing right now within the primary market is that there’s a scramble, and people are just looking for inventory,” said D’Angelo. “They’re paying top of the market prices for the pieces that they are acquiring, because they are just happy to acquire those pieces.” She indicated that the current trend suggests an irrationality in buyer behavior, specifically in terms of the astronomical prices being fetched for several emerging artists, making data analysis difficult to quantify. Ultimately, however, she surmised that “as long as ultra-high net worth investors continue to grow in both size and volume, I think they’re going to continue pouring money into the art market. I don’t think that trend is going to stop anytime soon. And I do think that for primary sales, it means that 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 a continually growing number of new collectors, gallerists are pressed to protect and ensure stable market growth for their artists. Selling an artist’s work for too high a price from the outset could create a bubble and prove detrimental to the artist’s market down the line. For established galleries representing blue-chip artists, maintaining relationships with longstanding clients is an additional factor that takes ample precedence over making a quick profit in the short term.
“The phenomenon at auctions seems, at its root, to be driven by the rich having even more expendable income to cause price rises for in-demand artists, rather than directly reflecting the basic economics of inflation felt by most Americans,” said Marianne Boesky, founder of Marianne Boesky Gallery in New York. “While that fact remains, the primary pricing structures created and managed by galleries do not ebb and flow according to supply and demand. We generally want primary pricing to correlate to each individual artist’s career trajectory.”
Boesky continued, “A demand-driven market doesn’t mean a whole lot for the primary-market prices of artworks if we are to keep our heads on straight.”
However, as is the case with many businesses, inflation does impact a gallery’s day-to-day operating costs. Boesky added that “the word inflation came up in our most recent staff meeting for the first time I can recall in 25 years.…The raw facts are that the costs of artists’ materials have risen, the costs to transport artworks have risen, the cost of every link in the chain of our business from the art supply store to delivery of a work to the client has risen.” To account for this, the gallery is in discussions to potentially implement a 10% increase in pricing across the board—which would be “practically, if not totally unnoticeable,” said Boesky, and it would not be on nearly the same scale as the record prices seen in other areas of the market.
“Prices are going through the roof—the prices of materials to crate artwork, the prices of moving artwork, the prices of transport, the prices of shipping—everything is significantly higher,” said Sean Kelly, founder of Sean Kelly Gallery in New York. “So one has two options: Jack the price of the work, or suck it up and deal with it—which is what we’re doing.” He explained that in his 30 years of experience, taking a long-term approach to economic fluctuations is imperative.
Supply chain issues have had an impact on galleries in other ways, as well. “We’ve certainly experienced delays in production from artist studios,” said Tina Kim, founder of Tina Kim Gallery in New York. “From canvas stretcher bars to sculpture raw materials, there have been severe delays in the delivery of goods. Shipping has been difficult and congested, and we’ve taken great measures to plan for art fairs and exhibitions.”
Kim continued, “Regardless of inflation, I’ve experienced a high demand for works, and that has factored into a price increase of our artists. It’s been challenging to secure inventory with the increase in demand. Our client base has expanded significantly since the onset of COVID-19, and we’ve undergone significant restructuring within the gallery to account for our online sales and inquiries.” She explained that the price increases have been calculated in order to maintain steady market growth. “One has to be very cautious when increasing artist prices,” said Kim. “Given the international nature of the market, since we are working with a broad audience, I feel confident with pricing and believe what I set to be healthy.”
However, the prices for works by emerging artists seen in other areas of the primary market suggest that not every dealer is taking such precautionary measures. While increased demand paired with short supply supports a bullish market poised for continual growth, if prices—particularly for emerging artists—skyrocket too rapidly, their market worth could take a downturn as they hit the secondary market.
Commenting on the prices and sell-through rates for young artists recently witnessed at major art fairs such as Art Basel in Miami Beach, Kelly warned that such valuations based on speculation could prove unsustainable, and the “people who push prices may lose money, while the artists they were gambling or speculating on are going to be really damaged.”
He said, “We are not pushing our younger artist’s prices through the roof…we’re not creating bubbles, we’re not speculating.” Kelly explained that these practices can be “really potentially counterproductive” for all parties involved.
So how can collectors best navigate the current market?
While buying art can certainly prove financially viable in the long term and beat inflation, it is vital for new collectors to make informed decisions on the works they’re acquiring, rather than adhering to trends.
“It’s always dangerous to buy art with speculation, and it’s important not to get caught up in the excitement,” said Kim. “I think if you follow the money, you can easily make mistakes. Art collecting is a true passion and lifestyle. There is good, exciting art at all price levels. It’s not something to invest your life savings in; I would never advise someone to invest in art. With a good, careful selection, you get to live with works you enjoy and your value in art will continue to go up.”
Sibylle Rochat, founder and director of London-based art advisory firm Rochat Art Consultancy, emphasized that “quality is king”—especially in a bullish art market, as we are seeing now—and collectors ought to be wary of jumping on trends without doing the research.
“Right now, anything and everything sells,” said Rochat. “So when a correction hits, all of the works that are not of high quality will disappear.” She explained that the art market goes through cycles, and certain works will fall out of fashion during periods of recession, lowering the price considerably.
While the current circumstances surrounding the art market are unique and the trajectory of economic factors remains to be seen, it’s important to remember that the art market will always go through cycles. “During periods of recession, even the wealthiest people are psychologically impacted by their paper losses, and they tend to pull back from spending on collectibles,” said Boesky. “These periods see collectors spending less, but not selling their great material into a soggy market. If they can afford to hold the art they love, they do.”
Although the outlook of rising inflation rates and its effects are unclear, building an art collection ultimately holds the same principles as ever: Buy what you love, do your research, and avoid getting swept up in trends.