What is the CPI?
The CPI, or Consumer Price Index, is a measure of the average change over time in the prices paid by consumers for a basket of goods and services. It is calculated and published by the U.S. Bureau of Labor Statistics (BLS) on a monthly basis.
The CPI is used to track changes in the cost of living over time and is often used as a measure of inflation. It is based on the prices of a representative sample of goods and services that are consumed by households, including items such as food, housing, clothing, transportation, and healthcare. The BLS surveys a sample of consumers to determine the prices they pay for these items and uses this information to calculate the CPI.
The CPI can be used to adjust for inflation when comparing prices or incomes over time. For example, if the CPI has increased by 2% over the past year, this means that the prices of the goods and services in the basket have, on average, increased by 2% over that time period. In real estate, the CPI can be used in a number of ways. Here are a few examples:
Inflation adjustment - The CPI can be used to adjust for inflation when comparing real estate prices or rents over time. For example, if the CPI has increased by 2% over the past year, this means that the prices of the goods and services in the basket have, on average, increased by 2% over that time period. By adjusting for inflation, it is possible to make a more accurate comparison of real estate prices or rents over time.
Rent escalation clauses - Many commercial real estate leases include a rent escalation clause, which allows the landlord to increase the rent based on the CPI or some other index. This can provide some protection for the landlord against inflation, while also providing some stability for the tenant, as the rent increases will be tied to a widely accepted and publicly available index.
Real estate investment analysis - Investors and analysts may use the CPI as a way to gauge the potential return on a real estate investment. For example, if an investor expects the CPI to increase by 3% per year, they may use this expectation to estimate the future appreciation of a property and its potential return on investment.
Mortgage rates - The CPI can also be used to help determine mortgage rates, as lenders may use the CPI or another index to adjust the interest rate on adjustable-rate mortgages (ARMs). If the CPI increases, the interest rate on an ARM may also increase, which can affect the monthly mortgage payment for the borrower.
Throughout my career, I've helped commercial real estate investors analyze opportunities to identify those that best align with their investment goals. If you're interested in purchasing commercial real estate in Louisville, KY or its surrounding areas, I'd be happy to help navigate you through the process! Feel free to call/text me at (502) 536-7315 or email me at raphael@grisantigroup.com.