Price Creep Definition and Example

What Is Price Creep?

Price creep describes the gradual and steady increase in the valuation or market price of an asset, or of price levels more generally in an economy.

Price creep refers to situations where an individual or a group of individuals gradually lessens their reservations about paying higher prices. Put differently, price creep can happen when people willingly pay higher prices, as in the case of inflation. It can also occur in financial markets when asset prices rise slowly but steadily over time, causing more buying, in turn.

Key Takeaways

  • Price creep occurs when prices rise slowly but steadily, often because participants become used to the incrementally higher prices and are therefore willing to pay more.
  • In the financial markets, price creep can lead to steadily rising prices for periods of time.
  • It can also lead to a big price drop when investors start to sell, creating a domino effect of sell orders hitting the market.
  • Price creep can lead investors to reexamine their valuations of a stock or other asset.
  • Sometimes this may lead to profitable outcomes, but it can also lead to paying too much.

What Does Price Creep Tell You?

Everyday life provides commonplace examples of price creep in action. Rates charged at movie theaters or for dinner at a restaurant can be subject to price creep, especially in high-profile urban areas. Over time, customers become accustomed to paying higher prices for the good or service in question.

As a result, prices at most businesses can keep rising year after year, in some cases in excess of the rate of inflation.

Price Creep in the Financial Markets

In the financial markets, price creep can be seen where investors gradually give greater valuation to a financial security. For example, at first, an investor may deem a given stock to be worth $10 per share.

But after following the company for a while and watching the stock's price trend upward, the investor may eventually relent and decide that $15 per share is a fair price for the stock, even though that person initially deemed $10 to be a fair market value.

Financial markets act as a feedback loop for participants. A person may think $10 is way too high of a price, but as others buy, pushing the price up to $11, then $12, the feedback the market is giving this person may cause them to rethink their original assessment.

Price creep can drive prices to extremes. While price tops in an asset are often associated with large price moves and high volume, they don't have to be. Price can steadily climb or creep higher, and then collapse as all those who bought during the steady rise rush for the exits at once.

Indexes, and the stocks they are composed of, can experience price creep, as can any other asset.

Price creep can sometimes be a warning signal to a technical trader. If a price is rising strongly, and then that momentum slows and the price starts creeping only marginally higher over several price swings, that could indicate that the buyers are no longer as interested as they once were.

Example of Price Creep in a Stock Index

The stock chart below provides an example of price creep. It displays the price performance of the SPDR S&P 500 ETF (SPY) during 2014. Through about the end of September, it moved in a strong uptrend. The price then corrected lower and subsequently rallied strongly to a new high. After this, the upward momentum visibly slowed, with the price barely able to make new highs. This is price creep. The price creep caused the index to wedge upwards at a flatter angle than during the prior rise.


Image by Sabrina Jiang © Investopedia 2021

In this case, the price creep indicated waning buying pressure. Investors became less enthusiastic about owning the SPDR as the price moved higher. Ultimately, buyers left the market and the price moved lower.

Price creep can last for a long time, so it isn't always a sign of trouble. However, the scenario of stock prices creeping up at a steeper angle typically is more bullish than prices creeping up just barely (with less conviction). The former shows stronger buying pressure than the latter.

Price Creep vs. Momentum

  • Price creep is the ascent of prices, usually at a slow and steady rate.
  • Momentum is strong movement.
  • Momentum has the effect of making people feel like they need to get in or they may miss out on a big move.
  • Momentum investors focus on buying stocks with strong upward price trajectories.

The Pros and Cons of Price Creep

Traders and retail investors may buy securities that are creeping higher to reap the rewards of higher prices. The steady and often calm rise is attractive and potentially profitable.

The downside is that a steady upward pace can lead traders and investors to become complacent. Those increasingly higher prices may eventually trigger selling. For instance, should the outlook for the market or a particular security become less positive, many investors hoping to ride that security for a bit of profit suddenly may head for the exits. This can cause a substantial price drop and potentially create a lot of volatility for a security that had moved predictably for a long time.

Do Prices Recover From Price Creep?

That depends on the products. For example, take the prices for grocery store items that have been increased by producers due to higher production costs. Shoppers often won't see a big drop in their prices once producers' costs have declined. Such price increases are referred to as sticky.

Can Price Creep Drive Prices Too High?

Yes. Producers can suddenly find themselves with greater numbers of unsold products when they've finally raised prices too much and buyers rebel. With stocks, a slow and steady increase in price can suddenly come to an end when a trading signal is triggered and sellers decide to take profits.

How Does Price Creep Affect Investing?

Price creep can relate to slowly increasing inflation. As inflation rises, purchasing power erodes. Investors with large percentages of their portfolios in cash and/or fixed income instruments should understand the need to alter allocations so that more of their money is invested in growth securities that may outpace inflation. This can protect the value of their savings and, ultimately, their future financial well-being.

The Bottom Line

Price creep is the gradual increase in prices that is accepted by consumers and investors. It often goes unnoticed. Every few months a restaurant may increase its prices by $0.25 for a meal. The change may not be perceived in the short term. However, seen over longer periods of time, the price change can be dramatic. These steady, slow increases tend to be better absorbed by the consumer than one large, shocking price hike.

Article Sources
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  1. AARP. "Prices of Hundreds of Drugs Outpace Inflation."

  2. US Bank. "Effects of inflation on investments."

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