The real estate industry seems to be breathing a sigh of relief. After months of rising interest rates, we are finally seeing them begin to ease, and inflation appears to be under control. In Germany, for instance, inflation peaked at 8.8% in 2022 but has since dropped to 1.9% year-on-year in the latest reading. Real estate yields also appear to be stabilizing. As a result, many in the industry are declaring that property is now fairly priced, and investors are back in “buying mode.” Optimism is returning to the market, and for some, it feels as though we’ve finally turned the corner.

Deeper forces at play

But while central banks may be congratulating themselves on taming inflation, the situation isn’t as straightforward as it seems. Beneath this surface-level improvement, deeper forces are at play—forces that may challenge the current optimism and keep inflationary pressures alive in the years ahead.

Several of the structural factors that contributed to the low inflation of the 1990s and 2000s are either less influential now or have shifted in ways that could create new inflationary pressures. Think of global trade, for example. In the past, expanding international trade, coupled with China's role as a major disinflationary force, helped to keep prices down. But this is not the case anymore. Without saying names, a number of powerful politicians are raising protectionist sentiment and announcing more and more tariffs – a clear inflationary force.

Labour markets in developed economies are also undergoing significant changes. In Germany, for example, figures published by the WSI reveal that 2023 had the highest number of days lost to strikes since 2015, with a staggering 1,527,000 days lost compared to 674,000 in 2022. This resurgence in industrial action adds further inflationary pressure, as wage increases resulting from labour disputes tend to push up production costs across the board – another inflation force.

Geopolitical tensions represent another inflationary trend that cannot be ignored. Recent disruptions, such as the blockage of the Suez Canal and ongoing conflicts in the Middle East, continue to create bottlenecks in global trade. These interruptions ripple across supply chains, increasing the cost of goods and transportation. For example, trade is increasingly being diverted from the Suez Canal to the Cape of Good Hope due to geopolitical risks, which prolongs shipping times and raises costs (I am told this is over $1M per ship per trip in fuel costs only). As these geopolitical risks evolve, they are likely to contribute to more volatile inflationary conditions.

Given these factors—trade stagnation, China’s shifting economic role, labour unrest, and geopolitical bottlenecks—the inflation outlook is far more complex and precarious than it might seem at first glance. While the real estate market is buoyed by falling interest rates, it would be a mistake to become complacent. These inflationary forces could re-emerge, making it essential for businesses and investors to protect themselves.