Expect Another 75bp Fed Rate Hike (at Least), Thanks to Inflation

With oil prices dropping, moderating the heavy influence energy has had on the economy, experts thought that inflation would drop. It didn’t. It got worse.

Not by a huge amount in one sense—the increase was 0.1 percentage points. But it was enough of a shock, given expectations, to send markets wavering. As of about 10:15 a.m., the S&P 500 was off about 2.6%, the Dow down 2.3%, and Nasdaq losing 3.2%, according to data from S&P Global Market Intelligence.

“Misses on both headline and core are disappointing as this bout of inflation proves to be anything but ‘transitory,’” Cliff Hodge, chief investment officer for Cornerstone Wealth, said in an emailed statement.

What it means for CRE is two-fold. First, the Federal Reserve is unlikely to moderate its continued interest rate hikes. Figure a minimum 75-basis point increase at its scheduled meeting next week is a given. There’s a chance that it will react to the change with a full percentage point jump, meaning even higher financing rates for everyone, including real estate projects of all types. This is worsening news for any who had originally financed at much lower rates and are coming up for refinancing.

Charlie Ripley, senior investment strategist for Allianz Investment Management, wrote that core inflation, without food or energy, at 6.3% rose “twice as fast” as economists had expected.

“It’s becoming more apparent to market participants that the amount of tightening from the Fed thus far has not been enough to cool the economy and bring down inflation,” Ripley said. “Given the data string we have witnessed in recent weeks, we are expecting a substantial change in the Fed’s dot plot from the June meeting and investors should brace for higher rates for a longer period of time.”

The second part of the impact is more indirect and has to do with the details of inflation, as the Bureau of Labor Statistics outlines. Energy and energy commodities had been the biggest drivers of inflation since early this year. Now they’re showing the biggest drops and still inflation is up. Even at that, energy is still up 23.8% over the last 12 months.

“Price gains were pervasive, with more than 70% of the CPI basket rising by at least a 4% annualized rate,” Hodge said.

Food was up 0.8% month over month. That’s the lowest growth since February, but still significant at an 11.4 percent unadjusted 12-month increase.

Shelter, meaning rent and, for homeowners rent equivalents, were up 0.7% month-over-month and 6.2% on a 12-month basis. As Oxford Economics put it, “Within the core services sector, shelter prices continue to lead the way, surging 0.7% — the fastest monthly increase since January 1991.”

Transportation was up 0.5% from July to August and is still up 11.3% over 12 months.

As consumers feel the increased squeeze over basics, confidence is bound to deteriorate as well as the ability to spend on other items. Retail and hospitality could well start feeling a greater pinch, potentially increasing risk to owners and operators from tenants. Casual travel, and therefore hospitality, could take a hit. Office, already feeling strains, might find that tenants don’t feel they can force people back into the office so readily, as that means more costs for the employees.

All in all, no good news.