CPI-U, % Change Year Ago, Seasonally Adjusted
The Consumer Price Index for All Urban Consumers (CPI-U) fell by 1.0 percent in May compared with a year ago, the sharpest 12-month decrease since April 1950. This is due to the rapid decline in energy and food prices since last summer, although they have rebounded somewhat recently. Core inflation, which excludes energy and food, is up a modest 1.8 percent from a year ago, well within the Federal Reserve’s target range of 1.5 to 2 percent. A debate is growing among economists over the potential for inflation. Some economists expect that government borrowing required to support massive federal deficits will spark higher interest rates and inflation, particularly if investors lose confidence in the government’s ability to maintain fiscal discipline. Another group of economists points to the anticipated sluggish economic recovery, which they say will keep the pressure off of wages and interest rates, two important catalysts for inflation. This group expects the government to raise taxes when the recovery becomes self-sustaining, which will keep the deficit at safe levels. Both groups raise important points. Most likely, inflation will not be an issue for at least a couple of years; the slow recovery will provide a window for the Federal Reserve to raise interest rates and siphon off excess liquidity in the economy. To keep inflation at bay over the long term, however, the government will need to address the chronic budget deficits forecasted by the Congressional Budget Office, either by raising taxes, cutting spending or – most likely – some combination of the two. For commercial real estate, a little inflation could burnish its long-dormant reputation as an inflation hedge, but this could be overshadowed by the industry’s need to recapitalize over the next few years.
Source: U.S. Bureau of Labor Statistics, Grubb & Ellis
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