Feeling the pinch

The price of luxury goods is rising faster than consumer goods on the high street. The wealthy may need to rethink their investment strategies if they don’t want to see the value of their assets decline in real terms

THE cost of living is going up – but the cost of living well is rising even faster. The latest edition of the Coutts Luxury Price Index (CLPI), published in December, shows that over the previous 12 months, prices of luxury goods in the UK increased by 5.9%. This was more than double the rate of inflation for consumer goods in general, which was just 2.4%. 

Few are likely to shed tears for the wealthy when it comes to the cost of maintaining their lifestyle, but rising prices for top-end products have implications for those managing wealth, as well as for the economy as a whole.

Measuring inflation

For decades, the UK’s Office for National Statistics (ONS) has gauged the strength of overall consumer price inflation, using the Consumer Prices Index (CPI) as its chief measure. The CPI is based on a ‘basket’ of consumer goods categorised under 12 headings that reflect life’s essential needs – such as food, drinks, clothing, furniture, health, transport and education – as well as some less essential requirements, including alcohol and tobacco, restaurants and hotels.  

Each year, the basket is adjusted to take account of shifting trends in purchasing behaviour and consumption. Items added in 2019 include popcorn, fruit teas, smart speakers such as Amazon Echo, and 
electric toothbrushes.

The CLPI ‘shadows’ each of the main categories. So, whereas the CPI includes items such as chilled pizza, frozen chicken and fruit pies under its ‘Food & non-alcoholic beverage’ category, the CLPI features Charbonnel & Walker Truffles. And while the CPI has men’s tracksuit bottoms and exercise leggings among its clothing selections, the CLPI offers a Kilgour bespoke suit – or perhaps Sir would like a Jermyn Street shirt?

Differences in weighting

When it comes to the weighting given to each category, however, this can be markedly different from that used in calculating the CPI. The reason is simple: wealthy people allocate their spending quite differently to their less fortunate peers. “However wealthy an individual is, the amount they can feasibly spend on food or telephone bills is limited,” Coutts notes.

Restaurants, hotels and overseas flights, on the other hand, are the kind of discretionary spending that the wealthy can afford to indulge in to their heart’s content. 

The weightings used have been drawn from £1.5bn of Coutts customer spending data – anonymised, of course – taken from credit and debit cards, cheques and transfers. In practice, says Coutts, every individual has a ‘personal inflation rate’ based on the proportion of their spending classified as luxury as opposed to everyday. 

Highest climbers

So, what does the latest CLPI show? Food is among the fastest rising luxury prices of the past year. Overall, food prices rose by 18%, helped by a 21% increase in the price of native oysters, due to rising demand from China and the loss of natural habitats. 

In the ‘Communications’ category – which includes smart phones and tablets – prices rose by 16%, presumably reflecting the range of premium products selected. A top-end iPhone X cost £1,150 a year ago; now its comparator, the XS Max, would ring up £1,450 on your credit card.

And one of the biggest rises of all was in ‘Alcohol’, with prices for investment grade whiskies up 26% – which Coutts attributes to the immaturity of the market – while fine wines appreciated at a steadier rate.

Restaurant and hotel prices were up by 5.6% overall, though in the case of top Michelin three-star restaurants, it was considerably more. The Fat Duck at Bray in Berkshire, for example, saw the price of dinner rise faster than one of its soufflés, from £265 to £325. And a night in a Junior Suite at the Gstaad Palace hotel in Switzerland was up a thumping 8.9%.

Other categories showed relatively low or even no inflation. Want to get behind the wheel of an Aston Martin DB11? At the end of 2018, it cost you pretty much exactly the same as at the beginning of the year.

Housing actually went down by 0.2% in the index, helped no doubt by the decline in prime central London property from its heady heights, and the uncertainty caused by Brexit. Household spending on high-end furniture, kitchens and decorative items has risen more sharply, however, as people invest more in the property they have rather than moving.

Growing demand

There’s no single reason, says Coutts, why luxury prices are going up faster overall than those in the mainstream. The bank cites ‘idiosyncratic moves in individual categories’ as one key driver. 

Another possible explanation is that demand for luxury goods is growing faster than supply, especially where there are constraints on how much of a particular item can be produced. 

An ONS report in February 2019 revealed that the rich are getting richer and the poor are getting poorer. The richest fifth of the UK’s population saw their disposable income rise by 7.5% over the previous year – well above inflation. 

Sarah Coles, personal finance analyst at Hargreaves Lansdown, says: “The gulf between the richest and poorest in the UK is growing, with the wealthiest fifth of the UK enjoying a boom in disposable income.” Higher taxes for wealthier families were easily offset by rising incomes, she adds.

To some degree, this is a global trend and it means there are more people chasing luxury goods and services. In Interbrand’s Best Global Brands 2018 rankings, luxury brands including Louis Vuitton, Gucci and Chanel were the fastest risers, reflecting the strength of demand for their products and the consequent pricing leverage they are able to assert. 

Luxury brands are renowned for limiting production in order to increase prices and improve their profit margins. With other luxury goods – such as those oysters or those fine whiskies – ramping up production to meet demand simply isn’t an option, and the result is that prices will soar. 

Rethinking investments

The consequence, in any case, is that wealth managers need to consider investment strategies that will keep up with the higher level of inflation among luxury items –particularly where luxuries such as private education are concerned. The price of private schooling has been outpacing inflation for decades.

In the 20 years from 1996 to 2016, five years of secondary fees almost tripled from £48,000 to £156,000. Coutts says the rate of fee inflation has fallen, but will continue to exceed general inflation at between 4% and 5% annually over the next decade. 

Mohammad Syed, Head of Asset Management at Coutts, says: “If you’re putting money aside to help realise a long-term goal, such as paying school fees for your children or grandchildren, or helping them to buy a property, the harsh truth is that the current interest you get from a savings account can’t keep up with inflation.

“While keeping your cash in such an account has advantages – easy access to your money and greater security – it may be beneficial to investigate other options, such as a long-term, diversified investment strategy.”

Fail to do so and the wealthy may find that the value of their assets is declining in real terms – both against mainstream prices and even more so against luxury prices. And if you allow that process to go on for too long, a serious wealth warning will be in order. 

Find an investment that keeps up with luxury goods inflation or you may soon be swapping those champagne truffles for a tin of Quality Street; eschewing a skiing holiday in Gstaad for a wet weekend in Grimsby; and passing on Heston Blumenthal’s latest tasting menu at the Fat Duck in Bray in favour of fish and chips at the nearest Wetherspoons.