No matter whether you represent a landlord or a tenant, your client’s lease probably has language that states the rent will increase with inflation. If you have a really good lease, it will be clear about how inflation is calculated and what inflation index is utilized, because inflation can be measured 8 different ways. In addition, when you measure inflation can be important: inflation in June was negative, meaning overall prices actually went down, which usually only happens in a recession. June’s 0.4% decline in the Consumer Price Index (CPI) was the largest one-month decrease in six years, and then in July the CPI increased only one tenth of one percent. This article examines inflation’s trend and how it affects the landlords and tenants that commercial real estate agents represent. Let’s get started.
What Is The Consumer Price Index?
Although the Consumer Price Index is one number, the index is a total of price changes for over 8,000 items nationwide, as calculated by the U.S. Bureau of Labor Statistics. Data is collected by telephone and publicly posted prices, but two-thirds of the data is collected by personal visits to brick and mortar stores. The data is organized by major categories such as Food, Energy, plus a third category with a typical government name, called “All Items Less Food and Energy.”
The categories can be broken down further to make the data more useful. For example, the Food category can be broken down into Food At Home and Food Away From Home, and furthermore, Food At Home can be further broken down into Cereals, Meats, Dairy, Fruits, and Beverages.
Why Did Inflation Decline So Much In June?
The inflation numbers for June show that inflation actually turned negative for several categories including motor vehicle insurance, communication, apparel, medical care, and used cars and trucks. Large price drops included electricity which fell 1 percent, apparel prices dropped .6 percent and transportation prices dropped .3 percent, but the major factor was a 9.7 percent drop in gasoline prices and a 9.2 percent drop in fuel oil. Even the July inflation numbers show a .7 percent decline in meat and poultry prices, a 2.9 percent decline in gasoline and a .6 percent decline in medical care.
The drop in gas prices is misleading because the last 12 months have witnessed skyrocketing prices of gas and fuel oil, so the large drop does not mean those prices are back to normal.
Where Is Inflation Headed?
Prices over the last 12 months averaged an increase of 3.4 percent. Just 4 years ago, inflation was 8% and landlords reaped the benefit of much higher rents based on that number. But that was when we experienced extraordinary economic stress due to Covid, suffering supply chain shortages exacerbated by wild consumer spending, resulting in the classic free market supply/demand curve with prices increasing. But in 2026, things are reverting back to the mean.
Inflation’s Long Term Trend
Since 1914, when we first started keeping records, inflation has averaged 3.3 percent. Since 2010, inflation averaged 2.6 percent and since 2020 averaged 3.9 percent. The conclusion from the data is that inflation should be expected to be around 3% per year, and we should recognize that the last 5 years have not been normal.
Commercial real estate agents can advise landlords to include language in their leases which allows the rent to increase based on inflation, but also allow for a minimum. A good lease will have language that says:
"At the end of the initial term, there shall be an annual reevaluation and increase of the basic rent based on the Cost of Living Index as published by the U.S. Department of Labor, Consumer, Price Index for Urban Wage Earners and Clerical Workers, U.S. City Average. However, under no circumstance is the base monthly rent to increase not less than 3 percent annually."
Another way landlords protect themself is to reduce the base rent but pass along the property taxes and insurance to the tenant in a triple net lease. This means the tenant would need to agree to incur the risk of any higher than normal increases
Tenants protect themselves by negotiating language in their lease which puts a cap on operating expenses passed along from the landlord. Sometime the language states that there is a cap on controllable expenses, such as landscaping, but there is usually no cap on uncontrollable expenses, such as property taxes and insurance.
All lease language can be negotiated and both landlords and tenants have the most power to force lease changes during the dating period, not after the marriage. Agents for landlords and tenants need to negotiate the lease language to protect their clients, no matter what inflation does.