Executive Summary
In June, the Consumer Price Index (CPI) dropped by 0.1%, bringing the annual inflation rate down to 3.0%. While energy prices declined for the second consecutive month, costs for shelter and motor vehicle insurance rose significantly.
Core inflation, which excludes food and energy, increased by 0.1% month-over-month and 3.3% year-over-year, slightly underperforming expectations of 0.2% and 3.4%, respectively. This marks the lowest annual core inflation rate in three years.
This cooling inflation trend strengthens the case for the Federal Reserve to begin cutting interest rates, with a 25-basis-point reduction anticipated in both September and December.
Falling inflation is poised to positively impact real estate investment, potentially driving recovery in the sector by late 2024.
Key Insights
- June Inflation Data: The CPI’s decline to 3.0% reflects easing pressures on consumer prices, with falling energy costs leading the charge. However, shelter price increases accounted for nearly 70% of the rise in core inflation, which grew by 5.2% year-over-year in June.
- Core Inflation Trends: At 3.3%, annual core inflation is at its lowest level since April 2021. While service sector inflation may remain stubborn, overall inflation is expected to continue trending toward the Fed’s 2% target.
- Fed’s Rate Outlook: The Fed is likely to respond to cooling inflation with interest rate cuts, starting with a 25-basis-point reduction in September, followed by another in December.
- Impact on Real Estate: Lower inflation and interest rates will create favorable conditions for real estate investment. Additionally, a softer labor market and easing shelter costs should further support this momentum.
The Bottom Line
June’s inflation data reinforces the expectation that the Federal Reserve will pivot toward cutting rates later this year. With core CPI growth slowing to its lowest annual rate in three years and overall inflation trending downward, the stage is set for the 10-year Treasury yield to drop to 4.1% by year-end.
For the commercial real estate sector, lower rates will act as a tailwind, potentially driving increased investment activity through the remainder of 2024 and into 2025.
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