- The Consumer Price Index (CPI) rose by 6.0% year-over-year and 0.4% month-over-month in February, in line with consensus expectations. Lower energy prices helped reduce the annual rate from 6.4% in January.
- Core inflation, which excludes food and energy prices, rose by 5.5% annually. On a month-over-month basis, core inflation increased more than expected by 0.5%.
- Although the Fed has made progress in its inflation fight, the February CPI reading makes clear its job is not yet finished.
- CBRE expects the Fed will increase rates by 25 basis points (bps) next week, provided that recent stress to the banking system eases. The Fed also may slow its quantitative tightening campaign.
- Over the near term, recent banking sector turmoil will be a headwind for commercial real estate, lessening occupier demand and dampening capital markets activity as credit underwriting standards tighten further.
The Bottom Line
The Fed has made progress in its fight against inflation, as the annual rate has fallen to 6% in February from a peak of 9% in June 2022. However, the rate of decline in annual inflation each month is beginning to slow and core inflation rose more in February than in January. This indicates that the Fed’s job is not yet finished.
Recent stress in the banking system—specifically, the second and third largest bank failures in U.S. history during the past few days—will complicate the Fed’s balancing of risks as it sets policy. Nevertheless, we expect that the Fed will increase the federal funds rate by another 25 bps next week to a range of 4.75% to 5%. Although more gradual rate hikes may be necessary, the Fed could pause if banking system stability further erodes. We also anticipate the Fed may slow its balance sheet reduction (quantitative tightening).
CBRE maintains its view that the U.S. economy will enter a recession later this year. Stress in the banking system will further impact credit availability for real estate and other parts of the economy. These factors will result in lower occupier demand and subdued investment activity. As the rate-hiking cycle peaks in coming months, we expect that capital markets activity and leasing demand will pick up late in the year.
Source: “Economic Watch: Annual Inflation Falls to 6% in February; 25-bp Rate Hike Likely Next Week“