Intelligent Investment

Economic Watch: Higher-Than-Expected Inflation in January Will Keep the Fed Cautious

February 13, 2024 3 Minute Read

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Executive Summary

  • The Consumer Price Index (CPI) increased by 0.3% in January and 3.1% year-over-year vs. respective expectations of 0.2% and 2.9%. Shelter costs accounted for most of the gain.
  • Core inflation, which excludes food and energy prices, rose by 0.4% for the month and 3.9% over the past year vs. respective expectations of 0.3% and 3.7%.
  • Although January’s CPI reading will reinforce the Fed’s cautious approach to lowering interest rates, we still expect the first cut will come toward the middle of the year, most likely in May.
  • Real estate investment activity likely will remain relatively sluggish in the first half of 2024 amid bond market volatility, before beginning to pick up in the second half.

The Bottom Line

January’s higher-than-expected inflation reading reinforces our view that the Fed will not begin cutting rates before May and potentially June. We remain confident that inflation will continue to trend down, though not uniformly each month. Consequently, we expect the bond market to remain somewhat volatile through the first quarter. CBRE believes that the 10-year Treasury yield will start falling gradually once the Fed begins cutting rates and will end the year at 3.6%.

High interest rates will limit real estate investment activity in the first half of 2024. However, we expect that long-term interest rates will slowly decline after the first reduction in the federal funds rate. This will clear the way for a mild pickup in investment activity during the second half of the year. A stronger rebound in leasing activity is possible due to continued economic growth.

Figure 1: CBRE House View

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