- Consumer prices rose a seasonally adjusted 0.4% in October versus 0.3% expected, and core CPI rose 0.3% versus a 0.2% forecast, the Bureau of Labor Statistics reported.
- Traders fully price a quarter-point rate increase at the Fed’s Dec. 8-9 meeting and put 13.6% odds on a half-point move, up from about zero before the report.
- Higher-for-longer rates matter to CRE because borrowing costs drive pricing, and Dallas Fed President Lorie Logan sees a need for two more quarter-point increases.
Prices climbed 0.4% in October, topping forecasts, and the CPI report has traders fully pricing a Fed rate hike in December, CNBC reports.
Core CPI, which excludes food and energy, rose 0.3%, versus a 0.2% forecast.
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What Drove It
Forecasters had penciled in 0.3%. September’s headline gain was 0.6%.
Energy rose 0.7% and gasoline 1%, even though pump prices have eased in recent weeks. Food rose 0.5%, transportation services 0.8% and shelter 0.3%. The BLS attributed over 30% of the monthly gain to shelter.
The BLS did not publish a yearly rate because last year’s government shutdown disrupted data collection.
The Fed Reaction
The Fed held its benchmark rate at 3.75% to 4% in October on a 10-2 vote. Traders now fully price a quarter-point increase on Dec. 8-9 and give a half-point move 13.6% odds.
Governor Christopher Waller said Tuesday in London that a hot report could push him toward a half-point move. Philadelphia Fed President Anna Paulson said gradual tightening seems appropriate.
Dallas Fed President Lorie Logan said two further quarter-point hikes look warranted before a pause. Stocks fell and Treasury yields jumped after the data.
Why It Matters for CRE
Rates set the pace of deal pricing. CBRE has argued cap rates could rise 40 to 60 basis points with the 10-year Treasury above 5%, and Marcus & Millichap now puts the 10-year near that level.
Buyers are already pushing back. Our report on CRE retrades found buyers requesting 5% to 10% price cuts as borrowing costs widen bid-ask spreads.
What’s Next
Logan flagged that the PCE price index, the Fed’s preferred gauge, could also rise when it is released later in November. A separate survey shows a net 37% of small businesses plan price hikes, the highest since July 2022.
