Taming the Inflation Beast: Why Current Inflation is Less Alarming Than Expected

[Alexander Szikla]

Based on the most recent data, it seems like inflation is not as high or pervasive as previously feared. Although inflation is still present, its effects are more muted than expected, affecting different areas of the economy unevenly. Persistent supply chain issues and strong consumer demand have not helped the issue subside; however, the core driver of inflation is and has been increasing shelter costs. Everything else is, comparatively, a bit “noisy”.

The job market has begun to turn away from historic lows with current unemployment brushing up against 4%. Rental rates will likely remain close to their “sticky” highs, especially after the recent corrections seen in quasi-oversupplied markets and consumers will have to pull back elsewhere.

Excluding shelter, core inflation has actually been at 2% for some time now. Has the Fed accomplished their mission?

Is it time to drop rates and potentially avert, or cushion, the impending pain in commercial real estate? Albeit a delicate balancing act, I believe that the Fed is in a strong position to, shrewdly, announce more rate cuts over a longer time horizon (perhaps 25 bps every six months through 2026 with one in 2024 – likely right before the election). Doing so would allow sidelined capital to be more aggressive and help alleviate the consistent housing shortages faced nationwide.

Bottom Line: Inflationary fears are moderating, suggesting a more stable economic environment than previously expected.