"Consumer Price Index"
% Change Y/Y, All Urban Consumers
Inflation continues to languish. The Bureau of Labor Statistics reported last week that core inflation, which excludes food and energy, rose just 0.8 percent in September from a year ago, the smallest increase since March 1961. This reinforces the likelihood that the Federal Reserve will embark on a second round of quantitative easing (dubbed QE2) with an announcement likely at its November 2nd-3rd meeting. In quantitative easing, the Fed purchases long-dated Treasury securities with the intention of driving prices higher and interest rates lower. The Fed deems this necessary because its usual policy lever, the short-term federal funds rate, is effectively at zero. The Fed hopes that lower long-term rates will lift the economy, but it will come at the expense of hundreds of billions more in debt, a weaker dollar, a looming currency war and the threat, however remote, of a loss of faith by investors in U.S. Treasury debt that could ultimately push interest rates higher, not lower. But the Fed appears willing to take those risks in return for stronger growth and inoculation against deflation – a prolonged decline in prices that would be very damaging. For commercial real estate, low interest rates are a key reason for renewed investor interest, particularly for core properties in primary, supply-constrained markets.
Source: U.S. Bureau of Labor Statistics, Grubb & Ellis