Intelligent Investment
Economic Watch: December Core Inflation Reading Buoys Financial Markets
January 15, 2025 3 Minute Read
Executive Summary
- The Consumer Price Index (CPI) rose by 2.9% year-over-year in December as expected, up from 2.7% in November.
- Annual core inflation, which excludes food and energy prices, fell by 10 basis points to 3.2%, beating expectations.
- Notably, shelter costs increased at the slowest pace in three years, while energy prices declined for the fifth consecutive month.
- Following a string of strong economic reports, including robust job growth in December, financial markets reacted enthusiastically to today’s inflation reading.
- CBRE expects the Fed to make three 25-basis-point interest rate cuts in 2025 as inflation eases.
- Higher long-term interest rates are a headwind for investment activity but easing inflation should make for a more supportive rate environment later this year.
The Bottom Line
Core CPI, which excludes food and energy, fell slightly to 3.2% year-over-year in December. Sizable annual increases included motor vehicle insurance (11.3%) and medical care (4.8%). The CPI’s shelter component, which accounts for nearly 40% of the index’s total value, had the smallest annual increase since January 2022 at 4.6%.
Despite persistent service-sector inflation in 2024, we expect price increases will moderate toward the Fed’s 2% target in 2025 as productivity gains and a slightly softer job market reduce the growth of unit-labor costs.
Higher long-term interest rates resulting from the federal budget deficit and persistent inflation will be a headwind for investment activity in 2025. However, this will be offset by solid economic growth, improving real estate fundamentals and tight credit spreads. On balance, we expect a modest increase in real estate investment activity in 2025.
Figure 1: CBRE House View
