Is Art a Good Hedge Against Inflation?

In times of high inflation, investors can have a preference to move part of their wealth to tangible assets, like gold, property, and art.

This is because inflation erodes the purchasing power of cash, as the goods and services purchased with cash become more expensive. Even the value of cash held in interest-bearing bank accounts, term deposits, or bonds are hardly protected, as the interest earned is typically far less than inflation. So, what can you do to hedge against inflation eating into your hard-earned wealth?

The answer might be to invest in hard assets like art and other cultural assets.

Why Art?

This is because the value of art can quite easily increase in line with rising prices. Inflation can be thought of as the condition where the number of dollars in an economy increases while the number of goods and services stays the same. Thus, when inflation is high, your unique artworks can attract more dollars simply because they are available to consumers to acquire goods and services.

This is a simplified version of the story, but the fundamental idea stands.

On the other hand, inflation can reduce demand for non-essential goods like art, as consumer’s disposable income gets sucked up by the rising price of essentials. In this case, the choice of art that you collect becomes critical, with art that experiences little or no reduction in demand performing the best. Essentially, you want to collect art that appeals to collectors that are less affected by inflation, and who can weather the rising cost of essential goods; this means you want to appeal to the wealthy, who are generally more conservative in their tastes.

Final Thoughts

Other than inflation, a few other variables contribute to the pricing of artwork.

As noted in How to Negotiate the Price of An Artwork, artwork is priced differently from other goods which typically have a more obvious use or standardization. With art, two same-sized oil paintings of the River Thames are not priced the same if one of those paintings is done by William Turner, and the other an artist with no profile. Many variables go into pricing an artwork, some mysterious, some conventional, but most the critical element might be ‘demand’. And with this being so, a case can be made for arts appropriateness as a hedge against inflation.