Higher Inflation Not Yet a Problem
14 Apr 2021
CBRE expects the CPI will peak at 3.2% in Q2 2021 and the Fed’s preferred core PCE measure will peak at 2.3% before moving back toward the central bank’s long-term 2% target. This forecast takes into consideration impacts of the pandemic, including business closures, millions of people still unemployed and temporary disruptions to supply chains. All of these will play a part in keeping price increases in check over the long term.
The Bottom Line
Inflation has been top of mind for many investors as price increases can often be an early signal of potential changes in short- and long-term interest rates. Given the Fed’s tolerance for inflation to move above 2% for some time after periods of low inflation, we do not anticipate the Fed will raise the short-term federal funds rate in 2021 or 2022. In addition, heightened economic uncertainty in much of the world and the attractive yield premium on U.S. debt compared with other countries likely will keep a lid on long-term interest rates. If not, the Fed has indicated willingness to help control the rise in long-term interest rates through open market operations, including buying long-term bonds with proceeds from the sale of short-term bonds.
In short, we expect inflation to increase in the coming months, but do not anticipate sustained inflation at a high level. We continue to expect a strong economic recovery will drive eventual improvement in real estate fundamentals and investment volumes this year.
Figure 1: U.S. Inflation & Interest Rates - CBRE House View (%)
Source: CBRE Research, April 2021.