- The U.S. economy is experiencing broad-based inflation at rates not seen since the late 1980s.
- Elevated inflation is being driven by both demand (stimulus, re-opening, excess savings, shifts in spending patterns) and supply-side factors (labor shortages, supply chain disruptions). Our analysis suggests that these factors will keep inflation uncomfortably high in the coming quarters, but the underlying pressures will fade as the pandemic disruption fades and as the supply-side of the economy rushes to meet demand.
- Monetary conditions are as stimulating as they have ever been. For this reason, the Federal Reserve has scope to reduce accommodation as it recently did by beginning to taper its asset purchases without undue risk to the recovery. The Fed has the tools it needs to tame inflation.
- A tail risk to this outlook would be if wage growth increases substantially and/or if inflation expectations become unmoored. We view this as a low probability scenario, but one to watch.
- If inflation follows the most probable script—higher inflation for a period but not damaging to the economy—then property stands to benefit. Our analysis shows that every 1% increase in inflation is associated with a 1.1% increase in total returns. This environment also results in lower cap rates across property sectors.
- In other words, commercial real estate not only protects against higher inflation but provides outsize returns specifically in these environments.