Headline and core inflation trend in opposite directions. In August, the headline Consumer Price Index recorded a year-over-year increase of 8.3 percent, slightly below the 8.5 percent rise recorded the month prior. The core CPI measure, excluding food and energy, advanced at a faster pace, however, ascending 6.3 percent year-over-year in August compared to 5.9 percent in July. This dichotomy is due to the influence of a sharp drop in gasoline prices on the headline measure. The greater expenses associated with food, housing, medical care and other necessities underscores the persistence of the current inflation pressures stemming from the ongoing global logistics challenges and broad-based shortage of labor.
Elevated inflation adds urgency to Fed rate hike plan. Last month’s stubbornly high inflation levels, joined with a positive employment report, underscores the likelihood of another federal funds rate hike equal to or exceeding 75 basis points later this month. This rate increase will coincide with an acceleration to the Federal Reserve’s monthly balance sheet reductions to apply renewed upward pressure on both short-term and long-term interest rates. Fluctuations in rates are complicating the financing process for both balance sheet and non-balance sheet lenders, prompting greater caution on under[1]writing. Commercial real estate investors may face more hurdles in closing transactions moving forward, although trading velocity was still historically elevated across most property types at midyear.