Backing off

Commercial real estate should find much to cheer in slowing inflation and a less aggressive stance from the Fed

November 15, 2022
  • Ryan Severino

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Quick takes:

  • Inflation continues to slow
  • Interest rates pulling back
  • Fed still likely to hike at next meeting
  • Future rate path unclear
  • CRE stands to benefit 

Last week inflation data from October showed more evidence of slowing, providing additional evidence that inflation has likely peaked and the Fed’s rate hikes are having the desired impact. While we are not yet out of the woods, it provides some hope that the Fed might not have to resort to extreme measures to get inflation under control.

An inflation surprise

In October both the headline and core consumer price index (CPI) contained positive surprises, with neither rising as much as anticipated. Consequently, the year-over-year increase in both measures did not rise as much as anticipated and decelerated relative to September. For the headline index, it marked the fourth consecutive month of year-over-year deceleration and the slowest pace since January. In a hopeful sign, both goods and services inflation also slowed on a year-over-year basis relative to September. Core goods inflation slowed considerably during the month, sliding to its slowest pace since April 2021. Core services held steady versus September. 


“…the data paints a picture of easing inflation even though it remains at an elevated level.”


One of the most important components of inflation, shelter, continued to rise at a fast pace, but this may be misleading. Because shelter inflation effectively includes multiple periods (as opposed to a single point in time), it likely understated inflation on the way up and is likely overstating inflation on the way down. That means inflation might have slowed even faster than the CPI data suggests. Overall, the data paints a picture of easing inflation even though it remains at an elevated level.

Inflation slowly slowing


Implications for the Fed

Despite the good news, the Fed seems likely to push ahead with an increase of 50 basis points (bps) in December, finally breaking the streak of 75 bps hikes. Their next steps will largely depend on the data. If inflation continues to slow, especially at a surprising rate, and underlying economic momentum decelerates, the Fed might not have to take the most aggressive stance. Some members of the Fed have already voiced such a view. But until we receive greater evidence and clarity of such slowing, all options remain on the table.

Markets cheer the news

Markets wasted no time in cheering the inflation news. Treasury yields, especially at the long end of the curve, pulled back noticeably as some investors believed the Fed will not need to get as aggressive as it previously seemed. The equity markets also received the news positively, with their best week since June. While markets do not perfectly process information, they at least reflect investor sentiment and that clearly turned more positive in the wake of the CPI data.

|  What it means for CRE  |

Like most other components of the economy, commercial real estate (CRE) stands to benefit from slowing inflation. If inflation continues to decrease the Fed could take a somewhat less aggressive stance and potentially avoid the worst of the potential economic outcomes. It remains too soon to declare this the case, but slowing inflation presents an unambiguously good outcome for CRE at this juncture. Although CRE remains a good if imperfect hedge against inflation, the downside risks to the economy, and ultimately CRE, outweigh any benefits from that hedge. The CRE industry should cheer slowing inflation but remain vigilant until inflation backs off in a more meaningful way.


“The CRE industry should cheer slowing inflation but remain vigilant until inflation backs off in a more meaningful way.”


|  Thought of the week  |

Roughly 4.5 million Americans have a second job, up 6% over the past year.

Note: There will be no economic insights published next week. Happy Thanksgiving.


Contact Ryan Severino

Chief Economist, JLL