Inflation, House Prices, Consumer Sentiment: What to Watch This Week

The economic landscape is a complex tapestry of interwoven trends, and this week, three key indicators are in the spotlight: inflation, house prices, and consumer sentiment. Each of these factors plays a pivotal role in shaping the broader economic outlook and influencing consumer behavior. Let's delve into what these indicators are telling us and what to watch for in the coming days.

Inflation: The Persistent Challenge

Inflation remains a critical concern for economists and policymakers alike. The US Index of Consumer Sentiment, provided by the University of Michigan, stands at 70.50 as of March 25, 2025, reflecting a 10.50% increase from one year ago. This rise suggests that consumers are becoming more optimistic about their personal finances and business conditions, which can encourage spending and investment in the housing market.

However, the Consumer Confidence Index®, reported by The Conference Board, tells a different story. The index was 104.7 in March 2024, essentially unchanged from the previous month. The Expectations Index, which measures consumers' short-term outlook for income, business, and labor market conditions, fell to 73.8, down from 76.3 in February. An Expectations Index reading below 80 often signals a forthcoming recession, indicating that consumers are more pessimistic about future economic conditions. This pessimism can deter spending and investment in the housing market, as consumers may be hesitant to make large purchases or take on new financial commitments.



House Prices: A Mixed Bag

The housing market is another area where inflation trends are having a significant impact. Mortgage rates are likely to range from about 6% to 7% unless there is a recession, making it more challenging for potential homebuyers to afford homes. This high level of mortgage rates will make it more challenging for potential homebuyers to afford homes, as higher rates increase the cost of borrowing. As a result, transactions could be based more on households making moves due to changes in jobs, finances, or household composition rather than pent-up demand from the last few years.

The Federal Reserve's monetary policy, which includes adjusting interest rates, plays a crucial role in shaping the housing market. The Federal Reserve doesn’t see inflation subsiding to 2.0% on a consistent basis until early 2026. This means higher but gradually declining short-term interest rates throughout 2025. Higher interest rates make borrowing more expensive, which can deter potential homebuyers and reduce demand for housing. This, in turn, can lead to a decrease in home sales and a potential slowdown in the housing market.

Consumer Sentiment: A Barometer of Economic Health

Consumer sentiment is a critical indicator of economic health, and recent data suggests a mixed outlook. The US Index of Consumer Sentiment, as provided by the University of Michigan, tracks consumer sentiment in the US. The index aids in measuring consumer sentiments in personal finances, business conditions, among other topics. Historically, the index displays pessimism in consumers' confidence during recessionary periods, and increased consumer confidence in expansionary periods. With rising mortgage rates and the potential for a recession, consumer sentiment is likely to decline, as consumers become more pessimistic about their financial future and the overall economic outlook.

The Conference Board's Consumer Confidence Index® was 104.7 (1985=100) in March, essentially unchanged from a downwardly revised 104.8 in February. The Present Situation Index—based on consumers’ assessment of current business and labor market conditions—increased to 151.0 (1985=100) in March from 147.6 in February. Meanwhile, the Expectations Index—based on consumers’ short-term outlook for income, business, and labor market conditions—fell to 73.8 (1985=100), down from 76.3 last month. An Expectations Index reading below 80 often signals a forthcoming recession. This indicates that while consumers are currently optimistic about the present situation, they are becoming more pessimistic about the future, which could be exacerbated by rising mortgage rates and the Federal Reserve's monetary policy.

What to Watch For

As we navigate the complexities of the current economic landscape, it's essential to keep a close eye on these key indicators. Inflation trends, house prices, and consumer sentiment are all interconnected and will continue to shape the broader economic outlook. Investors and policymakers alike should be prepared for potential volatility and adjust their strategies accordingly.

In summary, while current inflation trends indicate some improvement in consumer sentiment, the pessimistic outlook for future economic conditions can deter spending and investment in the housing market. Consumers may be more cautious about making large purchases or taking on new financial commitments, which can impact the demand for housing and the overall health of the housing market. Rising mortgage rates and the Federal Reserve's monetary policy are expected to have significant impacts on housing affordability and consumer sentiment in the coming months. Higher mortgage rates will make it more challenging for potential homebuyers to afford homes, while the Federal Reserve's monetary policy could lead to a decrease in home sales and a potential slowdown in the housing market. Consumer sentiment is also likely to decline, as consumers become more pessimistic about their financial future and the overall economic outlook.