The persistent inflation that has made headlines throughout 2022 refuses to subside, as the recent September price increases showed more generational growth. This time it was core CPI, a measure that removes food and energy prices, which tend to be more volatile. Core CPI increased by 6.6%, its largest annual growth in more than 40 years. While gas and energy prices have been coming down from summer highs, other goods continue to see steady and significant price increases. Overall CPI increased 8.2% annually and was in line with August price growth. As we enter the colder months in Europe and North America, the war in Ukraine will lead to significantly higher prices for natural gas and oil. According to a Wall Street Journal report on Monday, parts of New England may need to prepare for rolling blackouts during the winter as limited natural gas supplies may be diverted from electricity generation to heat generation. It is almost certain that energy prices will rise once again, contributing to even higher inflation. At this point, I expect additional 75-basis point increases to the Fed Funds rate when the policy setting committee meets again in November and December.
Rent and operating fundamentals continue to soften modestly, however investment fundamentals are taking significant hits because of inflation and rising interest rates. Many deals financed through floating rate loans are seeing cash flow drop quickly as interest expenses rise. As a result, many owners are choosing to limit or withhold investment distributions on existing assets. New deals are also falling through and fewer transactions are making it to the closing table. I expect 2022, especially the second half of 2022, to have some of the weakest transaction volume in the past 10 years.
Key Takeaways – Data as of 10/16/2022
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