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 become increasingly willing to 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 buyers to increase their bids, in turn.
- 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 higher prices.
- 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 rethink 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 tend to keep rising year after year, 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.
Real-World Example of Price Creep in a Stock Index
The chart below shows the SPDR S&P 500 ETF (SPY) moving in a strong uptrend. The price corrected lower then 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 the prior rise.
In this case, the price creep indicated waning buying pressure. Ultimately the price moved lower.
Price creep can last for a long time, so it isn't always a sign of trouble. However, prices creeping up at a stronger angle is typically more bullish than prices creeping up just barely. The former shows stronger buying pressure than the latter.
The Difference Between Price Creep and Momentum
Price creep is the ascent of prices but typically 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 may buy securities that are creeping higher. The steady and often calm rise is attractive and potentially profitable.
The downside is that a steady pace can often lead traders and investors to become complacent. Then, when the outlook doesn't look so rosy, everyone who was just hoping to ride the security for a bit of profit heads for the exits. This can create a lot of volatility in a formerly mundane security.
In the real world, price creep often goes unnoticed. Every few months a restaurant may increase their prices by $0.25 for a meal. The change isn't highly noticeable over a few months, but over several years the price change can be dramatic. These steady slow increases tend to be better absorbed by the consumer than one large, shocking price hike.