How Inflation in Consumer Goods Affects CRE

Many economists experienced a bad shock last week when the official consumer price index (CPI) was released. In reality, there was only one, and it suggested that the Fed would probably increase its benchmark interest rate by at least 75 basis points, if not more.

According to Charlie Ripley, senior investment strategist for Allianz Investment Management, “it’s becoming more evident to market players that the amount of tightening from the Fed thus far has not been enough to cool the economy and bring down inflation.”

Marcus and Millichap agree. The firm adds that “the headline Consumer Price Index posted a year-over-year gain of 8.3 percent in August, slightly below the 8.5 percent rise recorded the month prior,” citing the steep drop in fuel prices. The core CPI, which excludes food and energy, grew faster, rising 6.3 percent year on year in August, compared to 5.9 percent in July.

The Fed’s scheduled meeting later this week “will coincide with an acceleration of the Federal Reserve’s monthly balance sheet reductions to apply renewed upward pressure on both short-term and long-term interest rates,” the Marcus & Millichap post noted. The Fed’s scheduled meeting is when the rate increase is almost certain to occur. For both balance sheet and non-balance sheet lenders, rising financing costs “are complicating the financing process,” they continued. Moving forward, there will be “additional obstacles in concluding agreements.”

These are the immediate repercussions. However, the company also took note of some additional repercussions through the potential implications that certain parts of inflation could have on the firms that have rent obligations. Groceries and dining are “one area where consumers’ wallets have taken a big hit,” they noted, because despite the fact that food price inflation “slowed by nearly a third last month,” it is still up 11.4% annually.

Value-oriented meal alternatives are popular in both grocery stores and restaurants. Nevertheless, people are once again spending more on dining out than on groceries. According to Marcus & Millichap, “although food prices are rising, eating out offers a convenience and social experience that may offset the higher checks in consumers’ perceptions.”

However, decreasing gas prices could be a boon for businesses like hotels, offices, and retail. Despite the fact that fuel prices have risen over the last year, the 10.6 percent drop in the gas price index last month relieves some of the pressure on inflation, they say. Cheaper gas could also mean less expensive commuting, possibly making a return to the office more attractive to many. “Less pain at the pump will allow consumers to allocate discretionary funds elsewhere and may prove fruitful for leisure travel demand, aiding hotels and tourist-oriented retailers.”