Lower Inflation Figures Reflect Slowing Rent Growth
Recently released October consumer inflation numbers indicate less upward pressure on prices throughout national and Philadelphia commercial real estate markets, largely driven by weaker growth in housing costs, including slowing rent growth. The weaker inflation report comes after the Federal Reserve has already cut interest rates three times this year, in part to boost inflation closer to its target.
The slowdown in rent growth reflected in these lower inflation figures in the U.S. commercial real estate market – including Philly office space, Philly retail space and Philly industrial space – is consistent with the trend in CoStar data on apartment rents, which have decelerated to around 2.6 percent today from above 3 percent in recent quarters.
This CoStar Realty Information Inc. report from Robert Calhoun involving U.S. and Philadelphia commercial properties is being made through Philadelphia commercial real estate broker Wolf Commercial Real Estate, a Philadelphia commercial real estate brokerage firm.
According to the Bureau of Labor Statistics’ data, the consumer price index, which measures the price Americans pay for consumer goods and services, increased 1.8 percent in October compared to a year earlier. A meaningful increase in energy services and gasoline prices affecting U.S. and Philadelphia commercial real estate listings drove the slight uptick from the 1.7 percent increase seen in the previous month.
The core consumer price index, which excludes volatile food and energy prices and is a better measure of underlying inflation pressure, slipped to 2.3 percent year over year, down from 2.4 percent in September. The resultant decline in the U.S. commercial real estate market – including Philly office space, Philly retail space and Philly industrial space – was largely driven by housing-related costs.
The shelter costs among national and Philadelphia commercial real estate properties account for roughly one-third of the consumer price index and nearly half of the core index. While government figures show rent for primary residences growing at 3.7 percent from a year ago, month-over-month rent growth decelerated to just 0.1 percent. This is the slowest growth in more than eight years.
Goods inflation, excluding food and energy, slowed somewhat in October as well. Apparel prices were the primary cause. While they are very noisy, the month-over-month decline of -1.8 percent represents the third-largest drop in apparel prices since at least 1947.
Prices for goods may see upward pressure going forward because of higher tariffs on imports from China and a recent decline in the foreign exchange value of the U.S. dollar. Continued strength in the labor market and wages concerning national and Philadelphia commercial real estate listings should allow retailers to pass on much of the expected price increases through to consumers.
Households in the U.S. spend three times as much on services as on goods. Despite slowing shelter costs, services inflation rose slightly in October to 3 percent. The cost of medical care services has been rising dramatically in recent months and now stands 5.1 percent higher than a year ago. Unemployment among healthcare practitioners and technicians is currently just 1.1 percent, which could be pushing up the cost of such services.
This report is not likely to change the central bank’s current stance on interest rates, at least for now. Although inflation is not trending in the direction the Fed would like, the Federal Open Market Committee indicated at its meeting in October that it intends to hold interest rates steady as it monitors incoming data. (NOTE: Robert Calhoun is a managing director and senior economist for CoStar Market Analytics in New York City.)
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