This Week’s Developments in the US Economy

From Soft Landing to Slow and Steady: Why It Matters for Real Assets

Despite hopes for a fast unwinding of tight monetary policy, we see the Fed as likely to take a slow and steady approach in light of (or despite of) this week’s CPI reading. While most market observers have focused on headline (2.5% year-over-year) or core (3.2% year-over-year), we see the four consecutive months of CPI excluding energy, food, and shelter below two percent as a reliable indicator that we are well within soft landing territory (see accompanying visual). 

As we evaluate the economic outlook, the good continues to outweigh the bad. Key positive drivers—such as a robust labor market, moderating inflation, and resilient consumer spending—are supporting economic stability, even as risks like slower global growth and geopolitical uncertainties remain. While it is important to recognize that while the downside risks are real, the underlying strength of the economy, particularly in the US, is providing a solid foundation for consumer- and demographic driven sectors, in our view. Further, as inflation cools and the labor market remains robust, the likelihood of a deep recession diminishes. However, we see the Fed making the case next week that slow and steady is the appropriate path—primarily because it does not appear that major collateral damage has occurred. 

Progress on Price Stability
US inflation has been steadily declining and price stability appears to be within reach. As of August, headline CPI stands at 2.5%, representing a meaningful 40 basis point drop from the 2.9% recorded in July. Meanwhile, core CPI remained flat at 3.2%. This progress is attributed to several key factors, including improvements in supply chains, stabilization of energy prices, and the cumulative impact of aggressive interest rate hikes. However, while inflation is trending lower, we expect the decelerating pace of inflation to be more modest than many would expect otherwise. Simply put, though we have observed significant cooling in areas like wage growth and durable goods, some inflationary pressures, particularly in housing, continue to be persistent.

Finding Signal in Looking Past the Aggregate Data 
Several components have contributed to the improvement in inflation. Aggregate categories such as core goods and energy are in deflationary territory. Durable goods subcomponents such as transportation commodities and household furnishings have both exerted downward pressure on the Headline and Core CPI figures. The trend of slowing price pressures in these categories is supported by faltering demand, as indicated by the subdued year-over-year retail sales figures for motor vehicles and parts dealers and furniture stores reported in July.

Where we see noise—a distraction from otherwise more accurate inflation data—is that shelter continues to exert upward pressure on inflation and contribute to stickiness. While shelter has been on the decline since its peak in early 2023, in August, the shelter component added 2.3 percentage points to Core CPI, up from the previous month’s contribution of 2.2 percentage points. This component continues to be driven by the proxy measure Owners’ Equivalent Rent (“OER”), which in August saw a slight increase in year-over-year inflation compared to the previous month—far from the on-the-ground reality we see today. 

Inflation Moderation and Its Impact on Real Assets
While we are still seeing steady job creation, the slower pace of job growth indicates that the risk of overheating and reigniting inflation has diminished greatly. This moderation suggests that the economy is in a more balanced state—growth is continuing, but without excessive inflationary pressures. With inflationary pressures continuing to ease and expectations for a lower rate environment moving forward, we believe this sets the stage for an improved outlook for real assets, particularly those tied to sectors driven by consumer activity and demographic trends. Particularly as supply is expected to come back in line with demand, we anticipate the return of long-term fundamentals and demand-supply dynamics in select commercial real estate sectors.