‘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. This isn’t just nosebleed prices for nosebleed seats, but sky-high hotel prices during the big event. With people shelling out instead of cutting back amid central bank rate hikes, economists warn a summer of “funflation” threatens to keep inflation elevated—and credit conditions tight, supposedly kryptonite for the economy. On the surface, this is just another extension of rate hike fears, but we think the broader discussion is most telling about sentiment. Headlines are acting like today’s consumer behavior 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) that normally accompanies young bull markets.

While decelerating goods prices have led inflation lower since it peaked a year ago, fears have turned to stubbornly high or “sticky” services prices, like shelter or medical care. The alleged funflation threat is an outgrowth of this. Rather than take the good (overall inflation is falling and consumer demand appears to be holding up) with the bad (some prices aren’t stabilizing yet), economists are fixating on the bad parts. That this includes celebrity performances inevitably draws headline attention.

As the UK’s 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).”^[i] Because of performers’ celebrity stature, 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 carry the underlying assertion that this consumer behavior is somehow new, unprecedented and game changing, and central bankers won’t be able to see through it. Some analysts equate this to more rate hikes, risking recession. But paying up for entertainment isn’t a new phenomenon. Yes, the current wave is part of the return of normal spending patterns on services and away from goods. After COVID lockdowns, recency bias—when your latest experience heavily influences future expectations—might make it seem new. There is no evidence this is some weird, unprecedented demand surge, though. Big concert and sports tickets have been super expensive for eons, especially when you factor in the secondary market.

It is also normal for accommodation prices to jump. For Super Bowl LIV weekend in February 2020, on the eve of pandemic lockdowns, Miami hotels’ average daily rates soared 149% y/y ($617 a night).^[ii] Similar phenomena have long surrounded the Olympics as well as the World Cup, Formula 1 races, the World Series, NBA finals, major concerts, conventions and many, many more. It is the market’s way of meeting surging demand for a limited supply of beds.

The present alarm over elevated entertainment spending—which prepandemic no one would bat an eyelash at—strikes us as another instance of PoD. A big PoD hallmark is portraying all news as bad, even if it isn’t. We think this qualifies, given the underlying behavior 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 sports 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. 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. Entertainment costs are likely just getting attention now because of the visible impact on inflation readings in smaller nations, which stems partly from the base effect as big events were nonexistent during lockdowns. In Sweden, Beyoncé was blamed for fueling higher-than-expected inflation. (Note though, the issue here was overall prices didn’t fall as much as projected.) While that speaks to the continued heightened inflation focus, it is fighting last year’s war. Inflation globally is trending down, and leading indicators point to further slowing.

Like everyone else, we could do without the prolonged high prices people have been suffering through the last couple years. But nothing here is new. Funflation 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, funflation’s fecklessness doesn’t predict central bankers’ next moves. Those are always unknowable. 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 wall of worry stocks climb.