Consumer Necessities Inflation Have Implications for CRE

When the official consumer price index (CPI) came out last week, it was an unpleasant surprise to many economists. One, in fact, that signaled the Fed would likely raise its benchmark interest rate by at least a 75-basis point—if not more.

“It’s becoming more apparent to market participants that the amount of tightening from the Fed thus far has not been enough to cool the economy and bring down inflation,” said Charlie Ripley, senior investment strategist for Allianz Investment Management, in an emailed note.

Marcus & Millchap concurs. “In August, the headline Consumer Price Index recorded a year-over-year increase of 8.3 percent, slightly below the 8.5 percent rise recorded the month prior,” the firm writes, as fuel prices have seen a sharp decline. “The core CPI measure, excluding food and energy, advanced at a faster pace, however, ascending 6.3 percent year-over-year in August compared to 5.9 percent in July.”

The virtually certain rate increase later this week when the Fed has its scheduled meeting “will coincide with an acceleration to 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. Increased financing costs “are complicating the financing process for both balance sheet and non-balance sheet lenders,” they added. There will be “more hurdles in closing transactions moving forward.”

Those are the direct implications. But the firm also noted some other effects through the impacts that particular aspects of inflation could induce on the businesses that must pay rent. “One area where consumers’ wallets have taken a large hit is in groceries and dining,” they wrote, because even though inflation in food prices “slowed by nearly a third last month,” they are still up 11.4% year over year.

Value options are big in dining, whether in grocery stores or restaurants. And yet, consumers are once again spending more in restaurants than buying groceries. “While food costs are going up, dining out provides a convenience and social experience that may offset the higher checks in consumers’ minds,” according to Marcus & Millichap.

But lower gas prices were a potential gift to retail, offices, and hotels. “While fuel costs have jumped over the past year, the 10.6 percent drop in the gas price index last month lets out some of the pressure on inflation,” they wrote. “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.” Cheaper gases could also mean less expensive commuting, possibly making a return to the office more attractive to many.