CPI graph overlaid on cityscape.

Decoding the Economy: How CPI Can Help Predict Real Estate Losses

Nico Varela in Business & Economy December 2025 • 4 min read.

"Unlock hidden insights: See how tracking inflation through the CPI can give you a powerful edge in forecasting and mitigating losses in the commercial real estate market."

In the complex world of commercial real estate (CRE) lending, predicting potential losses from defaulted loans is a significant challenge. Factors such as extended resolution times and workout processes, particularly within regulatory frameworks like CCAR and CECL, make accurate forecasting difficult. These frameworks often restrict the use of post-default information, limiting the scope of macroeconomic variables (MEVs) that can be considered.

The current economic climate, characterized by persistent inflation and rising interest rates, adds another layer of complexity to loss forecasting. Traditional models often struggle to adapt to these rapidly changing conditions, leading to uncertainty and potential inaccuracies in risk assessment. To address these challenges, a new approach is needed that incorporates forward-looking indicators to improve the accuracy of loss given default (LGD) predictions.

This article explores how the Consumer Price Index (CPI), a widely recognized measure of inflation, can serve as a valuable tool for forecasting LGD in commercial real estate portfolios. By analyzing CPI growth rates, such as year-over-year (YoY) growth and logarithmic growth, we can gain insights into future trends in interest rates and CRE market prices. This information can then be used to improve the accuracy of LGD predictions, particularly in mitigating the underestimation of losses during economic downturns.

CPI: A Leading Indicator for Real Estate Trends?

The Consumer Price Index (CPI) is a comprehensive measure of the average change over time in the prices paid by urban consumers for a basket of consumer goods and services. Published monthly by the Bureau of Labor Statistics (BLS), the CPI reflects the prices of everything from food and beverages to housing, transportation, medical care, and education. Because it captures such a wide range of consumer expenditures, the CPI is considered a key indicator of inflation and economic activity.

Several transformations of the CPI data, such as year-over-year (YoY) growth rates and logarithmic differences, can be used to analyze inflation trends. These transformations provide valuable insights into the direction and magnitude of price changes, making them useful for forecasting future economic conditions. The CPI data has a close link to interest rates and CRE market sales price indices.

Year-over-Year (YoY) Growth: Measures the percentage change in CPI over the past 12 months, indicating the rate of inflation.
Logarithmic Difference: A transformation of CPI data that expresses the change in prices on a logarithmic scale, useful for analyzing long-term trends.

The Federal Reserve (FRB) closely monitors the CPI when making decisions about monetary policy. A high CPI reading often signals that the FRB will raise interest rates to combat inflation. These rate hikes increase the cost of borrowing for individuals and businesses, which can lead to a slowdown in economic activity and a decline in property values. The relationship between CPI and interest rates makes it a valuable tool for forecasting trends in the commercial real estate market.

The Future of CRE Loss Forecasting

By incorporating CPI data into LGD models, lenders and investors can gain a more accurate understanding of the risks associated with commercial real estate loans. This enhanced understanding can lead to better decision-making, improved risk management, and ultimately, a more resilient and stable commercial real estate market. With ongoing economic uncertainty, it is more important than ever to leverage all available tools and data to navigate the complexities of the market and protect against potential losses.

About this Article -

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This article is based on research published under:

DOI-LINK: https://doi.org/10.48550/arXiv.2402.15498,

Title: Using Cpi In Loss Given Default Forecasting Models For Commercial Real Estate Portfolio

Subject: q-fin.rm

Authors: Ying Wu, Garvit Arora, Xuan Mei

Published: 23-02-2024

Everything You Need To Know

What is the Consumer Price Index (CPI) and why is it important in understanding the economy?

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a basket of consumer goods and services. It is published monthly by the Bureau of Labor Statistics (BLS) and reflects the prices of various items, including food, housing and transportation. The CPI is considered a key indicator of inflation and economic activity, making it crucial for understanding economic trends. Its fluctuations often dictate monetary policy decisions made by entities such as the Federal Reserve (FRB).

How can analyzing transformations of CPI data, like Year-over-Year (YoY) growth and Logarithmic Difference, provide insights into future economic conditions?

Transformations of the Consumer Price Index (CPI) data, such as Year-over-Year (YoY) growth rates and Logarithmic Difference, are useful in analyzing inflation trends. Year-over-Year (YoY) growth measures the percentage change in CPI over the past 12 months, indicating the rate of inflation. Logarithmic Difference expresses the change in prices on a logarithmic scale, which is valuable for analyzing long-term trends. These transformations provide insights into the direction and magnitude of price changes, making them useful for forecasting future economic conditions. This analysis helps lenders and investors make informed decisions, particularly in volatile markets.

How does the Federal Reserve (FRB) use the CPI when making decisions about monetary policy, and what impact does this have on the commercial real estate market?

The Federal Reserve (FRB) closely monitors the Consumer Price Index (CPI) when making decisions about monetary policy. A high CPI reading often signals that the FRB will raise interest rates to combat inflation. These rate hikes increase the cost of borrowing for individuals and businesses, which can lead to a slowdown in economic activity and a decline in property values. This relationship between CPI and interest rates makes it a valuable tool for forecasting trends in the commercial real estate market, influencing investment decisions and risk assessments.

In the context of commercial real estate (CRE) lending, why is it difficult to accurately forecast potential losses from defaulted loans, especially within regulatory frameworks like CCAR and CECL?

Predicting potential losses from defaulted loans in commercial real estate (CRE) lending is challenging due to factors such as extended resolution times and workout processes. Regulatory frameworks like CCAR (Comprehensive Capital Analysis and Review) and CECL (Current Expected Credit Losses) often restrict the use of post-default information, limiting the scope of macroeconomic variables (MEVs) that can be considered. The current economic climate, characterized by persistent inflation and rising interest rates, adds further complexity. These restrictions and economic factors can lead to uncertainty and potential inaccuracies in risk assessment, making accurate forecasting difficult. Incorporating forward-looking indicators like the Consumer Price Index (CPI) can help mitigate these challenges.

How can incorporating Consumer Price Index (CPI) data into Loss Given Default (LGD) models improve risk management and decision-making in the commercial real estate market?

Incorporating Consumer Price Index (CPI) data into Loss Given Default (LGD) models allows lenders and investors to gain a more accurate understanding of the risks associated with commercial real estate loans. By analyzing CPI growth rates, such as year-over-year (YoY) growth and logarithmic growth, insights into future trends in interest rates and CRE market prices can be obtained. This enhanced understanding leads to better decision-making, improved risk management, and a more resilient and stable commercial real estate market. With ongoing economic uncertainty, leveraging CPI data helps navigate the complexities of the market and protect against potential losses, ultimately improving LGD predictions and mitigating the underestimation of losses during economic downturns. Understanding the CPI's relationship with interest rates and its impact on CRE market sales price indices is vital for effective forecasting.