Economic Watch: Annual Inflation Lower Than Expected in July

Executive Summary

• The Consumer Price Index (CPI) rose by 0.2% in July or 3.2% year-over-year, compared with consensus estimates of 0.2% and 3.3%, respectively.
• Shelter, food and energy costs accounted for most of the increase.
• Core inflation, which excludes food and energy prices, rose by 4.7% annually, below expectations of 4.8%.
• We believe that the Fed will likely hold interest rates at the current range of 5.25% to 5.50% given that core inflation has trended down over the past year.

The Bottom Line

Both headline and core inflation increased by 0.2% on a month-over-month basis in July. Though easing, housing costs remained the primary driver of inflation and are expected to continue falling in coming months. Energy prices ticked up in July due to global oil production cuts.

Although one more interest rate hike this year cannot be ruled out, we put the probability of this happening at about 40%. Easing inflation supports our base case view that the Fed is likely done raising rates and that by Q1 2024 will begin to cut them as economic growth slows and inflation moves closer to the central bank’s 2% target level.

CBRE still expects a moderate recession around year-end as the lagged impacts of tight monetary policy more fully take hold. Commercial real estate capital markets activity is unlikely to improve until the first half of next year, followed by a rebound in leasing activity.

Figure 1: CBRE House View