Economic Watch: With Easing Inflation, Fewer Rate Hikes Expected This Year

Executive Summary

• The Consumer Price Index (CPI) rose by 6.5% year-over-year in December, down from 7.1% in November and in line with expectations. This is the lowest inflation rate since October 2021.
• Core inflation, which excludes food and energy prices, increased by 5.7% year-over-year, down from 6.0% in November but still well above the Fed’s 2% target.
• Slowing inflation will allow the Fed to decrease the size and frequency of additional rate hikes this year, beginning with a 25-basis-point increase on Feb. 1 after six previous hikes of either 50 or 75 bps since May 2022.
• CBRE expects inflation will end 2023 at 4.0%, with the federal funds rate peaking at 4.75% to 5%.

The Bottom Line

Inflation’s downward trajectory in recent months is encouraging, but the persistence of relatively high core services inflation further underscores the Fed’s need to remain vigilant. We expect inflation will further slow but remain above the Fed’s 2% target throughout 2023 and end the year at 4%. The Fed will likely continue hiking rates, with a 25-bp increase in February and only one additional 25-bp hike expected after that. We expect that the federal funds rate will peak at a range of 4.75% to 5%, down from our earlier expectation of 5% to 5.25%.

Because the Fed likely will not begin reducing interest rates for several quarters, CBRE expects a moderate U.S. recession in 2023 as the lagged impact of tight monetary policy takes full effect. This in turn will extend the slowdown in real estate investment activity before beginning to recover around midyear. The recovery of leasing activity should begin late in the year.

Figure 1: CBRE House View