Falling commodity prices reflect cooling economy. While pricing pressures remain above target 27 months into the Federal Reserve's current monetary tightening cycle, meaningful relief is beginning to show. Annual growth in the commodities less food and energy index — which captures pricing changes for non-necessity items such as recreation, vehicles and apparel — has been in negative territory for six consecutive months and reached a near 20-year-low at -1.8 percent in June. Elevated costs for essentials such as housing services, medical care and vehicle insurance are constraining household budgets and limiting spending on discretionary items. These changes in consumers' spending habits helped lower headline CPI inflation down to 3.0 percent year over year in June, with a normalizing job market likely to help sustain a downward trend in the near term.

Pricing pressures for several services are poised to ease. The U.S. unemployment rate rose for the fourth straight month in June to hit a near three year high of 4.1 percent, signaling that labor supply is rising relative to demand. Fewer personnel shortages — especially in the health care, construction and vehicle maintenance industries — could begin to cool overall services inflation, as these constraints have contributed to lifting consumer prices for insurance and shelter. Reduced pressures on labor-related operational costs may also bolster the ability for service providers in all three industries to invest additional capital into leasing physical spaces, potentially a tailwind for medical office, industrial and retail property demand in 2024.

Retail sector remains stable amid spending pullback. Retail real estate is well positioned to navigate any near-term headwinds arising from a normalizing job market and changes in consumers' spending habits. The U.S. vacancy rate was the lowest among the four major property types at 4.5 percent in March, and was the only one to register a drop over the last year. New supply will also stay under 45 million square feet for the fourth year in a row, despite multi-decade high occupancy, motivating retailers to lease spaces when slots do open. Ollie's Bargain Outlet and Dollar Tree, for example, acquired most of the 300-plus 99 Cents Only Stores properties after the company filed for bankruptcy. Limited vacancy at power centers further emphasizes this dynamic, with recent big-box closures from Bed Bath & Beyond and JCPenney not significantly impacting property metrics.

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* Headline and Core CPI through June; Core PCE through May Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CME Group; Federal Reserve; Census Bureau; Bureau of Economic Analysis; CoStar Group, Inc.