Intelligent Investment

Economic Watch: Inflation Remains Above Fed Target But Lower Than Expected

March 12, 2025 2 Minute Read

Content-Team-Only-image13

Executive Summary

  • The Consumer Price Index (CPI) increased by 0.2% in February to an annual rate of 2.8%, lower than expectations of 2.9% and down from 3.0% January.
  • Annual core inflation, which excludes food and energy prices, also increased by 0.2% for the month to an annual rate of 3.1% versus expectations of 3.2% and January’s rate of 3.3%.
  • Transportation services (6.0%), shelter (4.2%), medical services (3.0%) and food (2.6%) had the highest annual inflation rates in February.
  • February’s inflation reading does not materially change our overall economic outlook for the year, which include slower growth, moderating inflation, lower short-term interest rates and long-term yields stabilizing near 4%. This will generally support real estate leasing and investment activity.
  • CBRE expects that the Fed will not change interest rates before midyear, barring any labor market deterioration. However, this forecast could change once U.S. trade policy becomes clearer.

The Bottom Line

Core CPI, which excludes food and energy, increased to 3.1% year-over-year in February, less than the 3.2% expected. Annual service-sector inflation remained high at 4.1% (excluding energy). However, the CPI’s shelter component fell to an annual rate of 4.2% in February, its lowest level since December 2021.

Up until now, we expected inflation to moderate this year but remain above the Fed’s 2% target. However, there is a growing risk of higher-than-expected inflation from U.S. trade policy.

Tariffs, particularly if they eventually lead to higher wage growth, will complicate the direction of monetary policy. This will cause continued financial market volatility and weigh on leasing and investment activity.

For the time being, consumer strength, robust business investment and lower long-term interest rates should provide a reasonably resilient market environment. However, there is only so much stock market decline that consumers and business can take, and there is growing risk of a material private sector retrenchment amid erratic trade policy. Although the prospect of rising unemployment and tariff-induced price increases will present an acute dilemma, we still believe that the Fed will cut rates later this year to support economic growth.

Contacts