Inflation Drivers and Outlook: November 2021

Supply chain bottlenecks and heavy demand for goods and services throughout the economy continued to raise consumer prices in November, based on the latest inflation reading from the Bureau of Labor Statistics. Prices for all items in the Consumer Price Index increased at a 6.9% annualized pace last month, the fastest increase in four decades. Inflation was up by 0.8% in November, month-over-month, following October’s 0.9% increase.

Consumer Price Index, 1970-2021

The biggest contributors to price growth in November were energy (+33.3% year-over-year), used cars (+31.4%), food (+6.1%) and shelter/rent (+3.8%). The rapid increase in energy prices, in particular, will take a bite out of consumers’ finances.

Consumer Price Index, Year-Over-Year, November 2021

There are a few important takeaways from the latest inflation reading as it relates to investment in multifamily. For one, inflation is proving more persistent than previously thought. Although we at CONTI believe the post-COVID supply-side “hangover” is the main impetus of price increases across the economy, it is clear that inflation will not be fleeting, given ongoing supply-side bottlenecks.

Policy decisions also come into play here. The Federal government faced an important decision in March of 2020. With the fresh memories of the policy errors made during the Global Financial Crisis, policymakers opted for an aggressive fiscal and monetary response to the public health crisis.

Government spending during recessions

An enormous amount of fiscal stimulus flooded the economy, which bolstered the financial markets and ushered in a swift recovery to the labor market. As a result, the negative economic impact of the COVID-19 crisis on the U.S. economy was experienced not as rising unemployment, but instead as rising prices.

For multifamily investors, this is a good thing: Not only did the labor market—the primary driver of multifamily demand—remain intact, but the consequence of maintaining the labor market’s strength was a higher rate of inflation, which is itself a possible boon for multifamily investments given its well-known status as an inflation hedge.

Although inflation remains a serious concern to the overall U.S. economy, we believe that most of the pressure on prices will eventually subside with the normalization of supply chains sometime in 2022. In the meantime, we expect the Federal Reserve to turn its focus to cooling down the economy through a faster reduction in bond purchases and a potential rate increase in Spring of 2022 as opposed to later in the year.