% Change M/M, All Urban Consumers
Consumer prices surged 0.5 percent in February led by a one-month gain of 3.4 percent in the price of energy. The core CPI, which excludes volatile food and energy prices, increased a modest 0.2 percent. Over the past 12 months, total and core prices rose 2.1 and 1.1 percent respectively. Core inflation remains well below the Federal Reserve’s informal target of 2 percent. However, several factors point to higher inflation in the future: large federal deficits that must be financed; rapid growth in emerging economies generating demand for resources and capital; stronger growth in the U.S. this year; consumer expectations of rising inflation; and the ability of some companies to pass through higher costs to their customers. In some emerging markets, inflation already is a problem with official year-over-year rates of 4.9 percent in China, 8 percent in India and 6 percent in Brazil. But in the U.S., the weak labor market has kept a lid on wages and salaries, which have risen just 1.6 percent over the past year. It will be difficult for inflation to fire up until more people are working, empty houses have been occupied and office vacancy rates have returned to equilibrium -- another two or three years at least. For commercial real estate, higher inflation will raise replacement costs and lease rates -- a plus for property owners -- but also result in higher mortgage rates -- a minus. These forces netted out to be a plus for commercial real estate returns during the last serious bout of inflation in the early 1980s.
Source: U.S. Bureau of Labor Statistics, Grubb & Ellis