⚫️August CPI Runs Hotter Than Forecast, But Markets Still Lean Toward a Cut

🚨 Headline CPI rose +0.4% MoM and +2.9% YoY in August, with core at +0.3% MoM and +3.1% YoY. Despite the upside, Fed funds futures still price a 25 bps cut next week, as labor softness dominates. For CRE, lower funding costs remain possible, but tariff pass-through risks could keep exit cap rates elevated.

• CPI: +0.4% MoM, +2.9% YoY

• Core CPI: +0.3% MoM, +3.1% YoY

• Market-implied odds of Sept 25 bps cut: ~90%

• Tariff risk flagged: inventories clearing could firm inflation

Loan Performance. Short-term easing could improve floating-rate coverage, but sticky inflation keeps spreads firm. Legacy loans with near-term maturities must still stress DSCR at >6.5% debt costs.

Demand Dynamics. Sticky CPI implies tenants continue facing elevated operating costs. For retail, tariffs may pressure margins. For multifamily, affordability remains challenged, limiting rent pass-through.

Asset Strategies. Exit underwriting should maintain cap-rate cushions. Owners may shift toward long-duration leases in inflation-resilient sectors (industrial, healthcare). Value-add office/retail faces higher exit risk if tariffs reinforce headline CPI.

Capital Markets. Curve inversion remains, but slope has eased. CMBS/CLO primary may tighten post-cut, but only modestly. Investors remain wary of structural inflation—limiting aggressive repricing of cap rates.

• CPI upside complicates, but doesn’t derail cuts.

• CRE debt relief depends on curve slope, not headline CPI.

• Cap-rate spreads must stay conservative.

• Tariffs reintroduce uncertainty into 2026 inflation path.

🛠 Operator’s Lens

• Re-price all live loans day after FOMC.

• Audit interest-rate hedges against a -25 bps policy baseline.

• Refresh escalators and budgets with 3% CPI, not 2%.

The September cut is still likely, but markets may be overly confident about the speed of disinflation. Watch the PCE deflator and tariff-linked CPI components for persistence. Lenders will widen spreads if growth deteriorates, even as base rates fall. For CRE, a shallow path to 2026 rates implies muted cap-rate compression and continued refinancing friction.

Reuters — link

Chart 1 - U.S. CPI vs. Core CPI, Jan 2023–Aug 2025

Chart 2 - Market-Implied Odds of September Rate Cut