Rethinking the Latest Inflation Data

When the headline CPI number on a year-over-year basis fell 30 basis points to 3.1% last week, it delivered a mixed message, according to a new industry analysis video from Marcus & Millichap.

The reading put it where it was last November.

But the metric that’s truly grabbing Wall Street’s attention, according to Marcus & Millichap’s John Chung, is the 40-basis point month-over-month increase in core CPI inflation, the largest month-over-month increase since April of 2023.

It caused Wall Street to reshuffle the bets on what the Federal Reserve will do with rates this year.

“When you boil it down, that 40 basis point month-over-month movement of some archaic inflation metric just isn’t that important,” said Chung, the firm’s Senior Vice President and National Director of Research and Advisory Services.

That core CPI measurement only matters for its effect on the Federal Reserve’s rate decisions over the next 10 months, and that only matters if the Fed moves rates materially, he said.

“I understand that an eighth of a point can materially affect whether a deal is net positive or net negative, but investors need to focus on developing an effective investment strategy for 2024 and beyond,” according to Chung.

“And in all honesty, a marginal change in interest rates shouldn’t be the principal driver of that strategy.

“Assuming there aren’t any giant curve balls, the Fed will probably start reducing rates in May or June, but they’ll likely slow play the rate cuts. They’ll be cautious.”

Looking to the end of the year, FedWatch predicts that 10% likelihood rates will be down by 50 basis points or less.

Chung expects that after the first rate cut, the second will likely be a couple of months after that, and a third cut would likely be a couple of months after the second.

“The Fed might slip in one or two more rate reductions depending on what happens with the economy or if there’s a major change in the outlook or there’s some black swan event,” he said.

“But if investors pencil in a slow play rate reduction of 75 basis points or so over the year, then that should provide a reasonably sound base model.”

He said that’s a “good trend,” one that is much better than trying to make deals work in a rising interest rate climate.

Therefore, for real estate investors, Chung said they should first review their portfolio to see if assets won’t deliver the targeted returns.

Next, he said to get an opinion of value on those assets to determine whether it makes sense to sell them and redeploy the capital.

“As for acquisitions, 2024 should be a roll-up-the-sleeves kind of year,” Chung said. “I wouldn’t be betting on a rising tide to deliver my target yields.”

He said investors should be looking for assets that can move the needle by creating value through property upgrades, repositioning, management or leasing, or some other value-added dimension.

“Value creation will be the name of the game, and I believe there will be a lot of value created in 2024,” he said. “This year will be a very good year to clear the dogs out of the portfolio and to get capital focused on creating value over the course of the next three to five years.”