The Bureau of Labor Statistics has reported that inflation is rising, by 0.8% in the month of April and 0.6% in March, according to the Consumer Price Index (CPI) for All Urban Consumers. Over the past year, CPI is up 4.2%, the largest increase since 2008. Taking out the volatile food and energy categories, the index rose 0.9% in April, the biggest jump since 1982. As the economy rebounds from historical lows set last year, inflation was anticipated. The debate today is whether this is temporary.  Some economists believe this is a short-term phenomenon, the result of economic reopening and recovery. Others believe it to be more than transitory, with recent Fed minutes indicating an openness to tapering asset purchases. Headlines note that a lack of microprocessors is affecting numerous industries, including automobiles, while consumer staples are pushing up prices. This is capturing the attention of everyone, spurring the highest number of Google searches for “inflation” since 2004.

Real estate has long been viewed as a hedge against inflation. Generally speaking, inflation has been quite tame since the 1970s and early 1980s. Studies from MIT and DWS have shown that commercial real estate price growth is highly correlated with the CPI. Multifamily may be the best positioned to push rents in a rising-inflation environment. Since it has the shortest lease term of the four major product types, landlords can adjust pricing more quickly, increasing both income and asset values. The longer lease terms of the other assets dampen price adjustment to some extent, but the “real” aspect of property supports rents and valuations in an inflationary environment.

Strong support remains for continued sales volume increases. Most important are near-record fundraising, the push from pension funds and other real estate investors which are under allocated to real estate, improving economic conditions, and attractive cap rates due to the low-interest-rate environment. Potential tax law changes along with inflation risk will only add more fuel to that fire.