Economic Watch: Inflation Eases in March

Executive Summary

• The Consumer Price Index (CPI) rose by 0.1% in March or 5.0% year-over-year, below consensus estimates of 0.2% and 5.1%, respectively. Shelter was the largest driver of the increase, offsetting declines in energy.
• Core inflation, which excludes food and energy prices, rose by 5.6% annually, in-line with expectations.
• The March report extends a trend of gradually declining inflation, which has now reached its lowest level in almost two years.
• Nevertheless, persistently high inflation should keep the Fed on track to increase the federal funds rate by 25 basis points (bps) next month. CBRE expects headline inflation to fall below 4% by year-end.

The Bottom Line

Headline inflation increased by 0.1% in March (5.0% year-over-year), continuing a trend of decelerating price increases. The deceleration was driven by lower energy and food-at-home prices. Core inflation, which excludes food and energy, rose by 0.4% for the month (5.6% year-over-year) due to rising shelter costs. Shelter is a major component of the CPI and these costs tend to lag changes in residential market rents. Therefore, we expect shelter prices to ease soon, allowing the CPI to fall below 4% by year-end.

Moderating price increases are encouraging, but core inflation remains well above the Fed’s 2% target. This will keep the central bank on track to hike the federal funds rate by 25 bps next month. However, should signs of undue economic or financial market stress emerge in coming weeks, there is a possibility that the Fed could forego a rate increase in May.

CBRE expects a moderate recession to take hold around midyear as the lagged impact of tight monetary policy slows the economy. Financial market volatility will temper real estate investment activity over the coming months before a recovery commences later in the year. Leasing activity should also see signs of recovery by year-end.

Figure 1: CBRE House View