Inflation

Ebbing Inflation Solidifies Potential 
of September Rate Cut from the Fed 

Pricing pressures fell to over three-year low. In July, annual growth in the headline Consumer Price Index (CPI) fell below 3.0 percent for the first time since March 2021. Meanwhile, core CPI inflation, which strips out prices for food and energy, also moderated to a 38-month low of 3.2 percent. After the labor market showed clear signs of softening in July, this continued, broad-based retreat in consumer pricing pressures safeguards the potential for the Federal Reserve to begin easing monetary policy at its next meeting. While Wall Street currently views a September rate cut from the Federal Reserve as a near certainty, the magnitude will likely be dictated by downward movement in the core PCE inflation measure released at the end of this month, and whether the U.S. labor market continues to slow.

 
Cooler housing costs have yet to show up in CPI. The shelter index, which tracks pricing changes for various forms of housing, climbed 5.1 percent year over year in July and accounted for 90 percent of the monthly inflation increase. However, the CPI housing indices lag real-time metrics, leading these segments to over-represent past pricing jumps. Data used for the CPI apartment rent index is only collected every six months, while the index for single-family homes — owners’ equivalent rent (OER) — is based on a weighted index survey on how much residents would pay to rent their own homes. Real-time data reveals price growth for both have cooled more than the CPI suggests. According to RealPage, multifamily rents ticked up by just 0.9 percent over the four-quarter span ended in mid-2024. Meanwhile, Zillow indicates rents for single-family homes grew 4.7 percent year over year through July, below the 5.3 percent jump in OER. Given their time lag, CPI rent and OER should trend toward these real-time metrics in the coming months, sustaining the ongoing cooling in overall inflation.             

Capital costs start to ease. After 12 months of holding the overnight lending rate steady, tempering inflation is providing the backdrop for a September rate cut from the Fed. While the degree will be dependent on upcoming economic data, the subsequent moderation in capital costs should provide motivation for buyers and sellers to reengage with the commercial real estate market. After last month’s rise in unemployment to 4.3 percent and corresponding drop in the 10-year Treasury yield, commercial mortgage rates have accelerated an ongoing decline, now totaling at over 50 basis points since May.

Real Estate Implications

Slowing inflation aids household formation. Growth in average hourly earnings oustripped inflation in the first six months of 2024. This helped build confidence for more individuals to form households. Over 571,000 were created in the frame, marking the strongest two-quarter span in two years. Much of the resulting housing demand  funneled into apartments, with elevated home prices and mortgage rates leading more of the population to rent. In the second quarter of 2024, multifamily net absorption breached 150,000 units for the first time since mid-2021. Still, rent growth will remain moderate, as an over two-decade high of 480,000 units is expected to deliver this year.

Despite softening, manufacturing sector still on solid footing. New and used vehicle prices fell 1.0 percent and 10.9 percent, respectively, year over year in July, revealing an imbalance of supply and demand in the automobile sector. While these drops hint at tapering demand for manufacturing space, a notion also supported by a recent dip in the Institute for Supply Chain Management’s Manufacturing Index, these types of properties remain well positioned. As of June, manufacturing facilities comprised under one-fourth of the active industrial construction pipeline, with 92 percent of the space already leased.

* Headline and Core CPI through July; Core PCE through June
Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.;
CME Group; Federal Reserve; RealPage, Inc.; Institute for Supply Chain Management