In an economy where higher interest rates continue to squeeze the livelihood of commercial real estate market participants everyone is keeping a close watch on economic indicators that could signal a shift in Fed policy.
All eyes are on monthly inflation data, and the latest June release delivered some positive news. The Consumer Price Index (CPI) for May held firm on a month-over-month basis and showed a 3.3 percent annual increase, inching closer to the 2 percent fed target. Notably, “supercore” inflation (excluding food, energy, and housing costs) decelerated to an annual growth rate of 3.4%, its slowest gain in three years.
Another key inflation measure, the Produce Price Index (PPI), which measures wholesale price inflation or the average change in prices that domestic producers receive for their goods and services, also showed signs of cooling. The recently released PPI for May declined 0.2 percent on a monthly basis and rose 2.2 percent annually. We asked leading economists to share their views on how they’re interpreting the latest inflation data.
Urban Land: From a real estate perspective, what specific data point within the latest CPI/PPI releases in June do you see as the most interesting and why? And do the latest CPI and PPI data mean for future Fed rate cuts and commercial real estate interest rates more broadly?
James Bohnaker, senior economist at Cushman & Wakefield
One of the most important data points in the CPI report is “supercore” inflation, or, more technically, the change in the price of core services excluding housing. This measure is closely watched by the Federal Reserve because it can indicate the extent to which wage pressures are influencing consumer prices for these labor-intensive services, which make up a large portion of the economy. It’s also important because, with other types of inflation (namely housing) running very high, supercore will need to come down meaningfully for overall inflation to hit the Fed’s 2 percent target.
In May, the supercore measure rose just 0.05 percent from [April’s], which was the slowest monthly rate of increase in nearly two years. This is noteworthy because it is the second consecutive month where we’ve seen a meaningful deceleration in supercore inflation after it had been re-accelerating since August of last year. That acceleration has been a key reason we have not gotten the interest rate cuts many expected [as we were] heading into 2024, so the latest data is a step in the right direction.
12-month percent change in CPI for All Urban Consumers (CPI-U), not seasonally adjusted, May 2023 - May 2024 (Percent change)
Victor Calanog, PhD, global co-head of research and strategy, Manulife Investment Management
There were few surprises in the May releases, with CPI and PPI figures slowing down, given tight monetary policy. Shelter inflation, which accounts for up to 40 percent of CPI, typically has a three-quarter lag relative to more real-time data on rents, and we’re seeing that manifest now. This gives the Fed wiggle room for at least one rate cut for this year, assuming the trend in slowing inflation continues. This should support greater transaction volume for CRE, with the possible caveat that things might slow down in advance of the results of the November presidential elections.
One-month percent change in CPI for All Urban Consumers (CPI-U), seasonally adjusted, May 2023 - May 2024 (Percent change)
Ryan Severino, CFA, managing director, chief economist, and head of U.S. research at BGO
Housing inflation continues to be mismeasured in the U.S., specifically because of owners’ equivalent rent (OER). OER is not a real expense—nobody actually pays it. It is a hypothetical expense, designed to measure the cost of owning a home, but that notion is difficult to measure at the best of times and impossible during an acute housing shortage. Moreover, owned housing is not a consumption good. It is a capital good, which is an asset. Households do not decide to buy housing based on the price alone, or even just the mortgage payment.
OER is distorting the perception of overall inflation and [presenting the risk of] an unnecessary downturn in the economy. If we exclude housing costs, which the Fed has no real ability to influence (especially during an acute housing shortage), inflation already sits near Fed target. Or, alternatively, the harmonized CPI, which effectively replicates the Eurozone’s CPI basket, also rests very near Fed target. Both demonstrate that the Fed could currently possess the same rationale to cut interest rates as other major G7 central banks.
Sam Chandan, PhD, director of the Chao-Hon Chen Institute for Global Real Estate Finance at the New York University Stern School of Business
The Fed does not view its current monetary policy as restrictive, so [its personnel] are in no rush to proceed with rate cuts. The labor market, the other half of [the Fed’s] historical dual mandate, shows robust job growth and only limited increases in measures of unemployment. We do not see a pivot away from the “higher for longer” strategy that the Fed has articulated. Even when [cuts] do arrive, real estate investors should not assume that cuts in the Fed Funds target rate in late 2024 and 2025 will translate into commensurate declines along the length of the yield curve. Stressing portfolios for a potential flattening of the yield curve and the possibility of somewhat higher long-term rates remains essential.
