‘Fun-flation’: An Analysis of Unusual Consumer Behavior Amidst High Inflation
Uncomfortably high levels of inflation are expected to persist, leading central bankers to repeatedly raise borrowing costs, causing further hardship for consumers and businesses. However, economists have identified a peculiar trend that has emerged this summer – consumers continue to spend on expensive and enjoyable experiences, such as nights out and concerts, despite soaring prices.
Central bank leaders both in the US and the UK are expressing concerns. The Bank of England raised interest rates by a half-percentage point, higher than anticipated, as they struggled to manage the highest inflation among G7 countries. Andrew Bailey, the bank’s governor, who is currently facing credibility issues, reasoned that failing to raise rates now could lead to even worse consequences later.
Shortly after, Jay Powell, the Federal Reserve chair, echoed these sentiments, warning of a similar threat and emphasizing their commitment to bringing inflation under control, suggesting that further rate increases are on the horizon.
Economists have observed an interesting anomaly within inflation data. Consumers are indulging in expensive meals, exorbitant airfare, and costly concert tickets. In Sweden, economists went as far as to attribute the surge in hotel and restaurant prices to the influx of Beyoncé fans during her recent visit. A similar effect has been noted in the US, with hotel prices soaring in cities where Taylor Swift performs.
Holger Schmieding, the chief economist at Berenberg, aptly termed this phenomenon “fun-flation.” Furthermore, the data indicates that this type of inflation shows no sign of abating. Schmieding remarks that we are in for a summer of amusement.
Typically, when inflation remains persistently high, consumers tend to cut back on spending. If they do spend, it is usually on durable goods like appliances, cars, or houses, as it is considered wise to make such purchases before prices increase further. While this behavior is partly evident, economists and central bankers are also observing increased expenditure on discretionary items such as travel and leisure activities.
This trend has been coined “revenge spending,” as people have a newfound zest to indulge in experiences now that the Covid-19 lockdowns are receding. Additionally, many individuals have accumulated savings during the pandemic or seen their wages rise over the past year. Grant Fitzner, the chief economist of the UK’s Office for National Statistics, specifically pointed to airfare, concert tickets, and computer games as significant factors contributing to the country’s stubbornly high inflation.
A summer filled with entertainment and leisure may prompt a more stringent policy response in the autumn. Torsten Slok, the chief economist at Apollo Global Management, asserts that the only way to bring inflation down to 2 percent is to curb demand and slow down the economy more substantially.
In other news:
1. The five people aboard the Titan submersible are presumed dead after a “catastrophic implosion” near the Titanic wreck, according to the U.S. Coast Guard.
2. Microsoft warns that it may abandon its acquisition of Activision Blizzard if a federal judge grants the F.T.C.’s injunction to delay the deal.
3. TikTok undergoes a leadership shakeup, with its chief operating officer, V. Pappas, leaving the company and Zenia Mucha, the former head of media relations at Disney, becoming its communications chief.
4. Warren Buffett donates an additional $4.6 billion worth of Berkshire Hathaway holdings to various charitable organizations, bringing his total charitable giving to over $51 billion.
5. Indian Prime Minister Narendra Modi secures a range of deals and economic cooperation pledges during his state visit to Washington, indicating a strengthening partnership with the United States.
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