If you're new here, welcome! We post weekly summaries on market trends and updates. This week, we’re sharing our report on inflation and what it means for consumers and the economy. To read the original report, click here or continue reading for our detailed summary.
In August 2023, headline inflation (CPI) rose by just 2.5% year-over-year, marking its lowest increase since February 2021. This cooling of inflation is largely due to a 4.0% drop in energy prices. When excluding energy and food, core inflation was up 3.2%, its lowest level in nearly four years, driven by falling commodity prices and slower growth in shelter costs. The Federal Reserve’s preferred measure, Core PCE, showed a 2.6% increase year-over-year in July, with a recent three-month gain of just 0.4%. If this trend continues, inflation could fall short of the Fed's 2.0% target.
Energy prices have been a key factor in easing inflationary pressure, with gas prices dropping 10.3% since August 2023. Housing costs are also stabilizing, as real-time data shows average apartment rent increasing only 0.9% year-over-year in June 2023. Additionally, the average 30-year fixed-rate mortgage has dropped from a peak of 7.8% in late 2023 to 6.4% in early September. These trends are easing financial burdens on consumers, helping boost household formation and sustaining strong retail spending, which in turn is benefiting demand for commercial real estate.
The cooling inflation and falling costs have set the stage for a likely interest rate cut by the Federal Reserve. A 25-basis-point reduction is expected at the Federal Open Market Committee (FOMC) meeting in September 2024. This cut could mark the beginning of a larger cycle of reductions, with analysts predicting the federal funds rate could fall to between 2.75% and 3.25% by December 2025. Additionally, the Fed has eased its balance sheet runoff, contributing to lower long-term interest rates, including a drop in the 10-year Treasury yield to 3.6% in mid-September.
Lower interest rates are expected to spur more commercial real estate transactions as financing costs decrease. With ample "dry powder" capital available, investors may take advantage of the favorable market conditions, potentially leading to a surge in real estate activity. As inflation cools and interest rates fall, the economy is likely to see continued strength, benefiting both consumers and the real estate sector.
Key Points:
Headline inflation (CPI) slowed to 2.5% year-over-year in August, the smallest increase since February 2021.
Energy prices fell by 4%, driving much of the overall inflation decline.
Core inflation (CPI excluding food and energy) rose by 3.2%, marking the lowest level in nearly four years.
The Fed’s preferred inflation gauge, Core PCE, increased by 2.6% year-over-year in July.
Gas prices dropped 10.3% from August 2023, reducing cost pressures on households and commercial real estate sectors.
The Federal Reserve is expected to cut interest rates soon, with the possibility of further reductions through 2025.
Source:
Inflation. Real Estate Investment Services. (n.d.). https://www.marcusmillichap.com/research/research-brief/2024/09/research-brief-september-inflation
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SuiteLifeMF has acquired, operated and invested in real estate for over 10+ years, investing in over 1500 doors and with over US$ 100 under management (900+ doors). The company also operates a property management company which handles a portfolio of single family homes. SuiteLifeMF maintains a disciplined approach to investing, which focuses on capital preservation and strong returns with a deep understanding of submarkets, economic and political situations.
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