Funflation and the Pessimism of Disbelief

What do Taylor Swift and Beyoncé have in common? Aside from being world-famous pop stars, both are reportedly responsible for surging prices—i.e., Swiftflation and Beyflation.^[i] This isn’t just nosebleed prices for nosebleed seats, but sky-high hotel prices during the big event.^[ii] With people shelling out instead of cutting back amidst monetary policy institutions’ hikes, economists warn a summer of “funflation” threatens to keep inflation elevated—and credit conditions tight, supposedly kryptonite for the economy.^[iii] On the surface, we think this is just another extension of rate hike alarm, but in our view, the broader discussion is most telling about sentiment. Headlines we read imply today’s consumer behaviour is somehow new and dangerous, as if major sporting and entertainment events haven’t skyrocketed nearby restaurant and hotel prices for decades. To us, this is a striking example of the pessimism of disbelief (PoD)—focussing excessively on negative developments whilst ignoring or dismissing positive ones—which we find normally accompanies young bull markets (periods of broadly rising equity markets).

Although decelerating goods prices have led inflation lower since it peaked last autumn in the UK and last summer in the US, warnings from commentators we follow have turned to stubbornly high services prices, like shelter or medical care.^[iv] The alleged funflation threat looks to us like an outgrowth of this. Rather than take the good (overall inflation is trending lower, albeit slowly, and consumer demand appears to be holding up) with the bad (some prices aren’t stabilising yet), we see economists fixating on the bad parts, like celebrity performances, drawing headline attention.^[v]

As the Office for National Statistics (ONS) reported recently, “Prices for recreational and cultural goods and services rose, overall, by 6.8% in the year to May 2023, up from 6.4% in April, and the highest rate since August 1991. ... The largest [increase] came from cultural services (particularly admission fees to live music events).”^[vi] Because of performers’ celebrity stature, it stands to reason from our perspective that given the prices they (and venues they perform at) can command—and the halo effect on local lodging and dining establishments—the cost of admission is higher.

The associated warnings of economic trouble from coverage we read carry the underlying assertion that this consumer behaviour is somehow new, unprecedented and game changing, and monetary policymakers won’t be able to see through it. Some analysts we follow equate this to more rate hikes on both sides of the Atlantic Ocean, risking recession (broad economic contraction). But paying up for entertainment isn’t a new phenomenon from what we can tell. We think the current wave is part of the return of normal spending patterns on services and away from goods. After COVID lockdowns, recency bias—when people’s latest experience heavily influences future expectations—might make it seem new. We find no evidence this is some weird, unprecedented demand surge, though. Big concert and sporting tickets have been super expensive for eons, in our experience, especially when factoring in the secondary market.

We think it is also normal for accommodation prices to jump. During the 2012 London Olympics, hotel prices surged as much as 75% y/y (£242 a night).^[vii] In our view, similar phenomena have long surrounded the World Cup (football and cricket) as well as Formula 1 races, Wimbledon, the Edinburgh Art Festival, major concerts, conventions and many, many more. It is the market’s way of meeting surging demand for a limited supply of beds.^[viii]

The apparent alarm over elevated entertainment spending—which we think few would bat an eyelash at before COVID—strikes us as another instance of PoD. Based on our observations, a big PoD hallmark is headlines’ portraying all news as bad, even if it isn’t. This qualifies, in our view, given the underlying behaviour is actually pretty normal. Who hasn’t saved up to be able to swing a big event once during the year? Maybe it was for a big concert trip. Or a sporting event. Or a vacation. Sometimes people cut back on these splurges during recessions, but the data thus far don’t indicate that we are in a recession right now.^[ix] So it seems to us like people are just living and budgeting as they normally do in a growing economy.

Most consumer spending is on essentials, not discretionary spending, and people have long managed both.^[x] We think entertainment costs are likely just getting attention now because of the visible impact on inflation readings in smaller nations, which stems partly from lower year-on-year comparison points as big events were non-existent during lockdowns. In Sweden, Beyoncé was blamed for fuelling higher-than-expected inflation.^[xi] (Note though, the issue here was overall prices didn’t fall as much as projected.) Whilst that may speak to the continued heightened inflation focus, it is fighting last year’s war, in our view. Inflation globally is trending down, and leading indicators point to further slowing.^[xii]

Like everyone else, we could do without the prolonged high prices people have been suffering through the last couple years. But we find nothing here is new. Funflation, in our view, is an old phenomenon repackaged to seem like a mountain-sized threat. In actuality, we think it is much more mundane. Maybe the celebrity name-dropping makes economics a little extra entertaining—or at least eyeball grabbing. For investors, though, we would set that aside.

As ever, we don’t think funflation’s fecklessness can predict monetary policymakers’ next moves. Those are always unknowable, in our experience. But for markets, we think the current funflation freakout is a good indication pessimistic sentiment continues to lower the expectations bar for reality to exceed and extend the proverbial wall of worry stocks climb.