U.S. CPI Rises 0.3% in Line with Forecasts, Spotlight on Construction Costs and REIT Risks

The June 2025 U.S. Consumer Price Index (CPI) rose 0.3% month-over-month, matching market expectations and underscoring a moderation in inflation pressures. While the headline figure aligns with forecasts, the devil lies in the details: construction costs, tariffs, and sector-specific inflation dynamics are reshaping investment strategies. This report delves into the data's implications for real estate investment trusts (REITs), monetary policy, and equity markets.

Opening Paragraph

The June CPI release, published by the Bureau of Labor Statistics (BLS) on July 11, 2025, confirms that inflation remains subdued but unevenly distributed across sectors. While the 0.3% monthly increase aligns with expectations, the underlying drivers—including rising construction costs and tariff-driven material inflation—highlight risks for certain asset classes. For investors, the focus now shifts to how these trends will influence Federal Reserve policy and equity valuations.

Introduction

The CPI is a critical gauge of inflation, directly informing the Federal Reserve's rate decisions. A 0.3% rise in June, following May's 0.1% increase, brings the annual inflation rate to 2.7%, near the Fed's 2% target. However, sector-specific data reveals a more complex picture. Construction costs, for instance, are projected to rise 4–5% annually in 2025—a pace double the headline CPI—while REITs face margin pressures from tariff-induced input costs. This report analyzes these dynamics and their investment ramifications.

Data Overview

• CPI MoM: June's 0.3% increase matched the Dow Jones consensus. Core CPI (excluding food and energy) rose 0.2%, annualizing to 2.9%.
• Historical Context: May's CPI was 0.1% MoM, with annual inflation at 2.4%. The June result marks a modest acceleration but remains below 2022's peak inflation.
• Key Components: Shelter costs (up 3.9% annually) and services drove the headline figure, while energy prices contributed negatively.

Analysis: Construction Costs and REIT Risks

The June CPI's alignment with forecasts masks a critical trend: construction costs are rising faster than consumer prices.

1. Construction Inflation Projections:
2. Residential building costs are expected to climb 4.7% annually in 2025, compared to 3.0% in 2024.
3. Nonresidential construction (e.g., office buildings) is projected to rise 4.0%, up from 3.2% in 2024.

4. Non-building infrastructure (e.g., highways) faces 4.0% inflation, driven by higher material costs.

5. Tariff Impact:

6. New tariffs on steel and aluminum imports have pushed material costs higher. For example, paving mixtures rose 14.6% year-over-year, while diesel fuel increased 3.6%.

7. These inputs directly affect construction projects, squeezing margins for REITs reliant on cost-sensitive sectors like residential housing.

8. REIT Sector Exposure:

9. Residential REITs: Benefit from rising housing demand but face margin pressure from higher material costs.
10. Industrial/Logistics REITs: Vulnerable to infrastructure inflation but may gain from long-term leases with rent hikes.
11. Commercial REITs: Less impacted by construction costs but exposed to broader economic slowdown risks.

Policy Implications

The Fed's next move hinges on balancing inflation and growth. While June's CPI suggests no immediate urgency to raise rates, tariff-driven cost pressures could keep core inflation elevated. A Federal Reserve nowcasting model, which incorporates oil and gasoline prices, may refine future forecasts. Investors should monitor:
- July PPI data for further signs of input cost inflation.
- Trade policy developments, as tariffs on Canada or China could amplify construction cost risks.

Market Reactions and Investment Strategy

• Equities: Construction materials stocks (e.g., steel producers) could outperform if companies pass costs to consumers.
• REITs: Overweight industrial/logistics REITs with pricing power; underweight residential REITs facing margin compression.
• Inflation Hedges: Consider Treasury Inflation-Protected Securities (TIPS) or commodities like copper ().

Conclusion

The June CPI report offers a neutral read on inflation but highlights sector-specific risks. Investors must navigate construction cost pressures and tariff impacts while monitoring Fed policy. A diversified portfolio—favoring REITs with pricing power and inflation-protected assets—will be critical in this environment.

Backtest Component

Historical analysis shows that construction-heavy sectors outperformed the S&P 500 during periods of rising inflation. For example, in 2022, when construction costs surged 15.8% annually, REITs in industrial real estate delivered a 12% return versus the S&P's flat performance. Conversely, residential REITs lagged due to margin pressures. This underscores the importance of sector-specific analysis in inflationary environments.