Economic Watch: Inflation at 40-Year High

Executive Summary

• The Consumer Price Index (CPI) rose by 7.9% on an annualized basis in February—its biggest increase since January 1982.
• Increases in gasoline, housing and food prices were the largest drivers of inflation.
• Due in part to Russia’s invasion of Ukraine, we expect inflation will remain higher for longer than our previous expectation of a peak in the first half of 2022.
• We still expect above-trend economic growth during the year, which will support improving real estate fundamentals and investment volume.

February CPI

Headline inflation—as measured by the CPI—increased by 7.9% on an annualized basis in February, the highest rate since January 1982. This significant rise in inflation was largely driven by gasoline, food and housing price increases. Core inflation, which excludes food and energy prices, increased by 6.4% over the past year.

Our Expectations Going Forward

The war in Ukraine’s impact on inflation will be more fully reflected in next month’s CPI. While economic impacts on the U.S. via direct trade links are expected to be minimal, we foresee further price increases for food and energy, as well as raw materials.

Russia and Ukraine account for nearly one-third of the world’s wheat exports and are key producers of palladium and neon gas for semiconductor production, as well as nickel used in electric vehicle batteries. Russia is also the world’s third largest exporter of oil. Price increases for these commodities will particularly impact food and energy prices. Consequently, CBRE expects inflation will continue to increase over the near term and likely approach 10% annualized.

Higher inflation may weigh on U.S. economic growth, but strong consumer balance sheets will help blunt any negative impacts over the near term. Furthermore, monetary and fiscal stimulus is still working its way through the economy. We expect U.S. GDP growth this year to be approximately 3.5%—down from an earlier expectation of 4.5% but still well above its long-term trend of about 2%. Consequently, the Federal Reserve remains on track for a rate hike of at least 25 basis points next week.

Underlying economic strength and improving property market fundamentals will support commercial real estate investment in the U.S. throughout 2022. Investor appetite for real estate in a low-yield but increasingly inflationary environment remains healthy. As a result, we expect investment volume for 2022 will likely be in line with the record volume of last year, with potential for modest growth.