What New Inflation and Spending Data Means for CRE Markets
The Federal Reserve’s primary inflation metric, Core PCE, elevated slightly on a month-over-month basis. However it remains well below the average pace of price growth set in 2024. On an annual basis Core PCE rose 2.8% in December, in line with expectations. Both the stock market and bond market are little changed following the release.
Source: BEA, Month-Over-Month Change in Core PCE shown
This is great news for investors anticipating one or two rate cuts this year. Nothing in December’s inflation data will prevent the Fed from acting this year. Even so, there will be another month of new data before the next opportunity to adjust the overnight rate. The more interesting story in today’s data release was another drop in the personal savings rate. There is also a revision that suggests people are having people are saving far less than the government previously thought.
Americans usually spend a higher proportion of their income when they feel confident about their financial standing. But, if rates continue to fall, eventually consumer spending will need to slow. This is especially true for consumers on the lower end of the income spectrum who are already utilizing a higher than typical portion of their available credit.
The trend is a double-edged for property owners, as the potential for more cautious spending in the months ahead will help bring inflation back down to the Fed’s goal. But the savings rate cannot fall forever. Once this trend reverses, there will be softening in retailer revenues and online shopping volume. An increasing savings rate could also inhibit many tenants from absorbing multifamily rent growth in 2025, and more cautious behavior could trigger heightened household bundling.
After two year of a restrictive interest rate environment, many owners and prospective buyers would feel positive about a softening of property fundamentals in exchange for cheaper capital for new investments. The bond market has some hurdles in its future, primarily an excess level of short-term treasury debt reaching maturity early in 2025. Most experts expect the treasury to restructure the debt into 5-, 10-, and 30-year treasuries. This, in turn, would apply near-term pressure to medium- and long-term CRE lending rates.
The combination of these two trends is likely to result in lending costs holding near current levels through at least 1Q. However, the 10-year treasury will eventually move toward the Fed Funds Rate this year with near certainty. Employment data for February is set to be released on March 7th. It will be the jobs report where Trump’s federal employee buyout hits the data.
The BLS is also set to finalize revisions to 2023-2024 employment data a month later in April. The preliminary estimate of that revision is likely to wipe 818,000 jobs off the tally. But, if Federal employment falls significantly and job revisions are more serious than expected, the Federal Reserve will have more wiggle room to cut this year. 50-basis points in 2025 could become 100-basis points quickly if the reaction to the labor data is overwhelmingly negative.
Aside from inflation finally reaching the 2% Fed target, labor market weakness and a pullback in spending are the major factors that could give the Fed more legroom on interest rates. With pressure from the White House to act, it’s likely Fed action will occur swiftly. It will likely do so once there is a true sign of weakness in the economy.
