Thoroughbred Racing and Inflation
By Kimberly Bowling, Marketing Manager,
In early November, Lexington was honored to host some of the finest thoroughbreds in the world during the Breeders’ Cup World Championship. Keeneland brought the world together in routine fashion and shone a bright spotlight on Lexington and the Bluegrass region. As we reflect on that experience and the international exposure to our community, it’s hard not to contemplate at least some of the potential implications our local experiences may have internationally. Inflation, perhaps?
The Keeneland Thoroughbred Auction House hosts four Thoroughbred sales annually and publishes an exhaustive record of its sales results. The horse racing industry is, perhaps second only to Major League Baseball, in its notorious stat-keeping, including sales transactions. In the aggregate, Keeneland’s total annual sales are well on their way back from post-pandemic lows ($450 million) to nearly $700 million in 2022 in a steady climb toward regaining levels in line with pre-financial crisis highs.
Of more acute interest, the average “price per head,” or price paid per horse, is on the rise and on track to hit an all-time high north of $100,000 per head in 2022 compared to an average pre-pandemic price of $77,000, and an average pre-financial crisis level of $90,000 per head.
We were curious about what, if any, implications increasing price levels in thoroughbred sales may have for broader price levels. By indexing the thoroughbred sale price data and evaluating the annual change in prices, it’s possible to draw comparisons with broader economic indicators such as the Consumer Price Index (CPI) and inflation. We find annual changes in, for lack of a better term, the Keeneland Sale Price Index from the prior year are moderately correlated with annual changes in the CPI over the following year. What does this mean?
Simply put, it means there is a statistical basis for the notion that thoroughbred sales prices in one year may serve as a leading indicator for the CPI and inflation the following year.
For example, the annual change in sales prices increased substantially in 2017 and the CPI followed with a gradual rise between 2017 and 2019. In 2021, the annual change in sales prices rocketed by 28% and yet again, the CPI has followed with sizeable increases in 2021 and year to date. Interestingly, the sale prices have tapered somewhat increasing by an estimated 5% in 2022. Might this mean a slowing rate of inflation for the broader economy in 2023?
Only time will tell, and it will be fun to keep tabs on this carnival indicator in the months ahead. However, remember correlation does not imply causation, it is unlikely the American Trust investment team will make the metric a part of its weekday forecasting dashboard.
Regardless, inflation is of economic importance because of its cascading effects. First, inflation is a serious factor for both fiscal and monetary policy. After all, inflation and unemployment are the chief focal points of central banks worldwide—many of which have adopted formal policies targeting maximum employment and price stability hovering around a 2% target inflation rate. Excessive inflation is treacherous in its ability to erode stored value. Increased prices reduce purchasing power, lessen the value of existing savings, discourage future savings, and can even reduce investment and employment.
In November, the Federal Reserve took swift action to curtail recent inflation increases by raising the federal funds rate by +0.75% to a target range of 3.75-4.00%, the highest range since before the financial crisis. Fed funds futures list an 85% probability of a +0.50% rate increase in December, a 56% probability of a +0.25% rate increase in February, and a 50% probability of a +0.25% rate increase in March before taking a pause at a target range of 4.75%-5.00% next Spring. This represents a total increase of +4.75% from the low in March 2020.
The factors driving inflation, as presented above, appear relatively balanced at this time. And this balance is bolstered contextually by the anticipated impact of the Fed’s ongoing quantitative tightening actions on the underlying economic fundamentals. We remain vigilant over the impact these actions may have on financial markets and client accounts, yet optimistic about the prospect of improved price stability in 2023 and beyond.
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