Get an economist’s take on the hot-button topic and its impact on real estate markets.
The path inflation is set to take after the COVID-19 pandemic has become one of the hottest topics in the investment world.
The pandemic has caused inflation across G7 countries to fall sharply, from 1.7 percent in January 2020 to just 0.6 percent at the start of 2021. Now, as recoveries start to take shape, inflation is expected to recover, too.
But by how much? The answer will ultimately drive decisions over what assets are best to buy, sell or hold.
Inflation can erode returns from income streams, asset values, or currency impacts for cross-border investors. The flip side of higher inflation is usually higher interest rates and therefore increased debt costs.
Read on to find out what David Rea, chief economist for JLL in EMEA, believes is on the cards for real estate markets and the true risk of inflation.
David, what would surging inflation look like?
A rebound to 2 percent would be a big shift compared to today – but would be in line with the rate that most central banks are targeting. For inflation to escalate, it would have to jump to at least 3 percent, and stay there for several years.
If inflation did surge, bonds and fixed income assets and securities would bear the brunt of the impact, with their income streams eroded.
Do you think we’re going to see high inflation after the pandemic?
There are many arguments in favour of surging inflation, but most are weak. A rise in commodity prices is the strongest argument, and will certainly increase prices and push up inflation, though we suspect the effect will be short lived.
Inflation is likely to rise towards 3 percent and remain elevated for much of next year before coming sharply back down, as base effects fall out of the picture. The net effect will be that over the pandemic and post-pandemic period, inflation should average around, or slightly below, 2 percent.
What about the release of pent up demand? That’s surely going to boost spending.
It would, but to a smaller extent than the vast levels of accrued savings are leading many to believe. Even if it does, it is unlikely to be inflationary due to the large amount of spare capacity, nor would it have a lasting impact.
What will you be watching for signs of inflation?
The current upward movement in commodity prices is something to watch. That may have a more significant effect on construction costs and activity. It’s certainly something for the real estate industry to watch in the coming months.
JLL is a leading professional services firm that specializes in real estate and investment management. JLL shapes the future of real estate for a better world by using the most advanced technology to create rewarding opportunities, amazing spaces and sustainable real estate solutions for our clients, our people and our communities. JLL is a Fortune 500 company with annual revenue of $18.0 billion, operations in over 80 countries and a global workforce of more than 94,000 as of March 31, 2020. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit jll.com.
