WEALTH REPORT: EUROPE
0.4% year-on-year, which is significantly below the 2% inflation level set by the ECB. This low general inflation reading has led to speculation that the ECB may begin printing money to buy up government bonds to prevent deflation.
Chart 3: Luxury goods price change, 2004–2013 % 100 80 60 40 20
Although the general European inflation rate remains benign, prices for luxury goods – from high-end wines, jewellery, designer handbags to sports cars – are rising at least twice as fast as the general inflation rate. In fact, chart 2 shows that the average price of a basket of luxury goods and services we have constructed grew nearly twice as fast as average inflation over the last ten years, up by 38% since 2004 versus just 18% for the general European inflation rate.
Cigars
European CPI2 inflation
Ready to wear
Fine wines/champagne and spirits
Writing instruments
Travel goods
Bags
Jewellery
The sky is the limit for luxury goods and services With little sign of a short-term end to the expansionary monetary policy that is propping up asset markets, the prices of luxury goods can continue to rise faster than the average inflation rate for some time to come. And as wealth continues to rise, luxury goods may become an increasingly desirable way to differentiate the scale of a wealth holder’s discretionary economic power, causing prices to rise even higher.
+38%
130 +18%
110 100 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Luxury goods price index
Luxury leather goods
Source: Bloomberg Finance L.P., Bank of America Merrill Lynch, Euromonitor, Julius Baer
Index
120
Watches
2 CPI = Consumer price index
Chart 2: Luxury prices rise faster than average inflation 140
Luxury electronics
0 -20
These consumption trends are likely to have two clear effects: first, with rising luxury goods prices, wealth holders consuming luxury goods are likely to see a gradual yet persistent reduction in their purchasing power; and second, companies producing luxury goods and services are likely to benefit disproportionately from the structural trend causing luxury goods prices to rise higher and higher.
European consumer price index
Source: Euromonitor, Bloomberg Finance L.P., Julius Baer
Rising wealth of asset owners drive luxury prices The sharp rises in luxury prices have largely been driven by the increasing wealth of asset owners who benefited most from liquidity-inspired asset price rises. And with a growing amount of money chasing a limited amount of luxury goods, prices typically increase. This has been the case with all luxury goods segments, except for cigars (chart 3).
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