Inflation: Can We Panic Yet?

Some of the terms experts in finance and economics used this morning regarding the 9.1% headline inflation number: hotter-than-expected, fiery, eye-popping. And for any who remember the 1970s and 1980s, perhaps the scariest: another record.

Inflation has been higher at times in the past, but the pain is ratcheting up at an historical pace, repeatedly raising the question of what to do. Forget “Keep calm and carry on.” At times like these, it’s better to remember another source of British philosophy—the late Douglas Adams and a repeating theme of The Hitchhiker’s Guide to the Galaxy: Don’t Panic.

It’s still time to not panic because that only does more harm than good. Instead, look at the details of what is going on and remember, when it comes to inflation, the U.S. has gotten through worse times.

One point is that, as David Kelly, chief global strategist at J.P. Morgan Asset Management, put it in a note, “Core CPI most surprisingly exceeded expectations, underscoring the lagged impact of higher food and energy costs on a broad range of consumer goods and services.”

Those aren’t direct costs to the CRE industry, but they are indirect weights on business. Consumers generate almost 70% of U.S. GDP. When their costs go up, they have only so many resources available. Consumers are piling on credit card debt at record levels while savings slip.

Eventually, consumers spend less and the economy slows—and while a recession has not been officially called, evidence is strong that the country is already in one. 

As the economy slows, there’s less demand for commercial real estate. The ability to weigh compressed cap rates against future higher rent roles becomes problematic. Property prices are already down almost 5% from recent highs. Owners and investors should make plans on whether recent streaks of skyrocketing valuations 

Also, with inflation high, the Federal Reserve is almost guaranteed to continue the 75-basis point increase, at least for now. Historically, the Fed has increased rates far less than the so-called Taylor rule would have suggested, likely because they aim to get a “soft landing” for the economy and not a heavy crash. Still, each increase can push financing rates up.

While inflation continues to rise, it’s important to consider alternative plans and strategies for property valuation, financing, and operations. For those that have been in markets for longer periods and are not recent comers attracted by the unusual market conditions of the last few years, there may even be advantages. If some investors get scared off, or can’t justify higher financing rates, it could mean less competition and eventually higher cap rates with more affordable property prices.