On Friday, the Federal Reserve Bank of Philadelphia released the Survey of Professional Forecasters. The panel now projects consumer price inflation will hit 6% in the second quarter of 2026. That is nearly double the current headline CPI rate of 3.8%. Three months ago, the same panel forecast 2.7%.
The revision follows US and Israeli military strikes on Iran. Energy prices surged. April CPI data showed the highest consumer price growth in nearly three years. The producer price index posted an annual rate of 6%, the steepest reading since December 2022.
The panel also revised its PCE inflation projections sharply higher. Headline PCE, the Fed's preferred measure, is now forecast at 4.5% for Q2. Core PCE sits at 3.4%. Prior estimates were 2.7% for both.
For the full year, forecasters put headline CPI at 3.5% and core CPI at 2.9%. That is up from 2.6% for both in the prior survey. Elevated inflation is expected to persist into Q3 before easing toward year-end, with Q4 headline CPI projected at 2.5% and core at 2.7%.
The panel's 10-year projected annual average sits at 2.4%. The survey notes that would be equivalent to roughly 2.22% by the Fed's PCE standard. That remains above the central bank's long-run target of 2%.
The inflation outlook complicates the transition at the top of the Federal Reserve. Kevin Warsh is set to assume the role of Fed chair. Although Warsh has indicated a preference for lower interest rates, policymakers have signaled they intend to hold rates steady. Some leave open the possibility of further hikes if inflation continues to deteriorate.
For commercial real estate capital markets, the implications are direct. Mortgage rates, already elevated, face upward pressure. The 10-year Treasury yield, the benchmark for CRE debt pricing, will respond to persistent inflation and hawkish Fed posture. Spreads on CMBS and agency debt will widen.
Forecasters also trimmed growth expectations. GDP is projected to expand at a 2.1% annualized rate in Q2 and 2.2% for the full year. That is down 0.3 percentage points from the prior estimate. Growth is expected to slow further to 1.9% in 2027 before recovering.
The unemployment rate is forecast to settle around 4.5% this year, up 0.2 percentage points from the current level. Slower growth and higher unemployment reduce tenant demand and rent growth, compressing NOI for office, retail, and industrial assets.
The combination of higher inflation, slower growth, and steady-to-higher rates creates a stagflationary tilt. For CRE borrowers, that means higher debt service costs, tighter underwriting, and lower leverage availability. Floating-rate loans will reset at higher SOFR floors. Fixed-rate borrowers face elevated all-in costs.
The Survey of Professional Forecasters is a respected panel of economists. Its dramatic revision in just three months signals that the inflation problem is not transitory. It is structural, driven by geopolitical supply shocks and persistent demand. The Fed's 2% target is not within reach.
For lenders and investors, the message is clear: the cheap debt era is not returning. Capital costs will remain elevated. Underwriting must price in higher inflation and slower growth. The margin for error in CRE underwriting is shrinking.
Kevin Warsh inherits a Fed that is not cutting rates. He may prefer lower rates, but the data does not support that preference. The panel's forecast suggests rates will stay higher for longer. That is the new baseline for CRE capital markets.