Inflation trend may be turning corner. The headline Consumer Price Index in July was up 8.5 percent compared to a year prior, a deceleration from the 9.1 percent year-over-year jump recorded in June. This slowdown was driven predominantly by a month-over-month decline in energy prices, led by a 7.7 percent drop in the gas price component of the index. The costs of other items, most notably food, continued to rise however. Setting aside energy and food, core CPI advanced 5.9 percent year-over-year in July, matching the pace set in June but below the 6.4 percent year-over-year increase reported in March. Stability in the core index paired with a smaller rise in the headline rate suggest that inflation may have peaked, likely a reflection of less impeded supply chains and tightening monetary policy.
Additional quantitative tightening still on the docket. While slowing, inflation is still high, which will likely prompt the Federal Reserve to raise the overnight lending rate again in September. Next month the Fed will also double its level of balance sheet reductions to $95 billion in monthly volume. Long-term interest rates, such as the 10-year Treasury, will likely feel upward pressure as a result. The combination of elevated inflation and climbing interest rates will be a challenge for investors, however, the market has already begun to recalibrate. In some cases, prices are being adjusted or buyers are reducing leverage. Investors may also be considering new locations or asset types. Overall, the market is liquid, with investors holding favorable long-term outlooks.
Multifamily outlook largely unfazed. The impact of high inflation and rising interest rates is so far not having a substantial impact on the underlying need for housing. Demand for apartments surged in 2021, with net absorption eclipsing 650,000 units, nearly double the previous peak. That metric has been more tempered in the first half of 2022, due in part to delayed eviction proceedings, as well as limited options for prospective tenants. June’s 3.2 percent national vacancy rate was a three-decade-plus low for that time of year. Tight availability aids rent growth in the near-term, while a structural housing shortage also lends strength to the outlook for the next three to seven years.