As many expected, the Federal Reserve chose not to lower rates at its meeting last week, signaling continued caution about potential inflation risk. Several factors could push inflation higher over the coming months, according to John Chang, Marcus & Millichap’s chief intelligence and analytics officer.
First, tariffs may play a significant role in driving up inflation. Tariffs on consumer goods are likely to start appearing this summer, while tariffs on raw materials like steel and aluminum will eventually impact prices on everything from cars to building materials to appliances, said Chang.
A recent surge in oil prices – an increase of about 20% to $75 per barrel since the beginning of June – also could put upward pressure on inflation. Oil prices are closely tied to the dynamic Israel/Iran conflict in the Middle East, Chang said.
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A third force affecting inflation is shipping costs. Since the first week of April, the cost to ship a container from Asia to the West Coast has increased by 167% to nearly $6,000.
“All of these inflation pressures will take time to manifest, but that's exactly what the Fed's thinking about: What will inflation look like in four to six months?” said Chang.
Chang said the other thing the Fed is considering in its rate cut conversations is the overall health of the economy. Job creation remains relatively sturdy and May’s core retail sales were up 1.7% compared with last year, although they were down by about 0.3% from April.
“Retail sales were elevated in the first four months of the year, but it looks like they're beginning to taper a bit,” said Chang. “Retail sub-sectors that are showing some signs of weakening over the last month include building supplies, restaurants and bars and electronics. But the real question in my mind is how durable consumers will be in the second half of the year, and structurally, I think the consumer is still in a good place.”
Household debt continues to climb, but incomes are climbing as well, he said. Household debt as a percentage of income is 60.9%, down by a full percent from a year ago. Auto loan debt is 5.5%, down 20 basis points from a year ago, and credit card debt as a percentage of income has basically been flat at 4%. Meanwhile, savings are up about 3.6%. As long as the employment market holds and unemployment doesn’t surge, the consumer should be well-positioned to sustain consumption, said Chang.
“The big question on that front will be consumers' willingness to spend, and although consumer sentiment bounced, it's still low by historical standards,’ said Chang. “That's what will likely shape the economy in the second half of the year, whether consumers remain sufficiently confident in the economy to keep spending.”
Wall Street is assigning a 63% likelihood that the Fed will drop rates by 50 basis points or more by the end of the year, a prediction Chang said may be a stretch. For real estate investors, however, the current investment climate still looks solid.
“Fundamentals for some property types in some areas may prove to be a bit choppy through the second half of the year, as trade challenges and uncertainty weigh on decision making and interest rates may face upward pressure, but for most property types and locations, the performance outlook remains positive,” said Chang.
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Kristen Smithberg
Kristen Smithberg is a Colorado-based freelance writer who covers commercial real estate, insurance, benefits and retirement topics for BenefitsPRO and other industry publications.
