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Inflation soars in luxury goods sector

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Prices of typical luxury goods and services for UHNWs based in London increased by an average of 6.0% in the 12 months to the end of April 2011, marking a significant jump in price inflation, following a 0.6% rise the previous year, according to data released by multi-family office The Stonehage Group.

 
This large increase, measured by Stonehage’s Affluent Luxury Living Index (SALLI), compares to an average inflation rate of 4.5%, measured by the UK Consumer Price Index (CPI) over the same period.
 
SALLI 2011 reinforces findings that UHNW inflation is much more volatile than CPI, tending to exceed standard inflation in good times and significantly fall short in times of downturn.
 
Among the biggest drivers of inflation this year is the rise in rental prices of high-end property in London, where costs jumped by 6.7%. This trend is largely fuelled by higher demand as recent price rises in prime property have led many to rent rather than buy in London’s most prestigious areas. The difficulty in obtaining mortgage finance has also contributed to the demand for rentals.
 
The rise in the costs of rented property contributed to a total increase of 5.7% in the housing and family category.
 
The consumables category showed a strong rise of 18%. Of particular note was the increase in the value of the wine index, which tracks the price of fine wines. Prices were 27.6% higher than last year as recovery, particularly in the financial services sector, fed through to discretionary spending. Champagne was also impacted with prices rising by more than 8%.
 
The culture and entertainment category was 10.3% up on last year. Of particular note was the art index, which showed a 10.5% rise driven by high auction prices.
 
The category for investments of passion, which included luxury car brands, was 4.7% higher than a year ago.
 
Price increases in US dollar-priced items such as yacht hire, up 5.1% on last year, helped to fuel a 5.4% rise in the sports and recreation category.
 
Travel costs were 3.1% higher as the prices of private jet hire and first class airline tickets increased.
 
Ronnie Armist, Executive Director at Stonehage Investment Partners, says: “At Stonehage Investment Partners, we use SALLI to help us analyse the true costs of living for our clients. The increase in VAT had a small, 0.6%, impact on the inflation figure. On a static currency basis, inflation would be 7.5%, reflecting the relative strength of Sterling against the US Dollar for dollar priced items. The large rise in SALLI shows that confidence about prosperous times is growing triggering a return to spending. Prices in London are also likely to have been impacted by a larger than normal influx of foreigners into the city.”
 
Stonehage Affluent Luxury Living Index (SALLI) London, a proxy for price inflation experienced by London-based HNW and UHNW families, was first published in 2007 in order to track the prices of a basket of luxury goods and services regularly purchased by UHNW clients. The basket forms the basis of the index and consists of approximately 50 goods and services on a ‘per use’ weighted average basis. The basket includes items such as private education, central London rental costs for a family property, a day’s grouse shooting and fine wine and cigars, based on Stonehage’s knowledge and experience of the spending patterns of London-based UHNW families. Prices in the index are the recommended retail prices (incl. VAT) and SALLI accounts for the frequency of purchase of each item over one year. Prices were recorded between 2002 and 2011.
 
The index methodology was initially reviewed by Professor Geoffrey Wood of the Cass Business School.

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