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Inflation could be about to see a big drop, even with tariffs still looming over the economy.
The US housing market will be a big driver of headline disinflation, according to Rosenberg Research, which foresees a major drop in home prices that could drag the pace of inflation close to 1% — well below the Fed’s 2% price growth target.
The firm, led by top economist David Rosenberg in 2020, said it saw evidence of a “big downturn” in the housing sector. In a note to clients this week, the firm pointed to its proprietary Housing Market Activity index, a gauge of how busy housing is based on eleven indicators of activity.
The index is now showing that housing is mired in its worst downturn since 2009, around the time the subprime mortgage crisis plunged the economy into a recession, Robert Embree, a senior economist at the firm, said.
Haver Analytics/Rosenberg Research
Ten of the 11 indicators that feed into the index are posting significant declines over the last six-month period, Embree added. Here are the five showing some of the largest drops in activity:
Housing starts: down 23.9%New single-family homes sold: down 23.7%Existing homes sold: down 16.1%Quarterly New Tenant Rent Index: down 14.2% over the last two quartersPotential buyer traffic: down 7 points. This is the most important data point feeding into the index, Embree said.
The only indicator that hasn’t contracted over the last six months is home prices. The Case-Shiller 20-City Composite Home Price Index, which tracks house prices in 20 major metropolitan areas, is up 0.8% over the last half-year.
But reduced activity will likely weigh on prices, as sellers will need to lower prices in order to entice buyers back to the market. On a six-month basis, the Case-Shiller Composite will likely enter negative territory “very soon,” Embree said.
That could lead to a big drop in inflation down the line — even as some economists worry that tariffs could stoke higher prices for consumers. Shelter prices make up around a third of the consumer price index.
“This housing downturn will have persistent disinflationary consequences into 2026 as today’s low rents compress the shelter component of CPI with a predictable twelve-month lag,” Embree wrote. “The massive drop in new rents implies a headline CPI reading of +1.2% to +1.8% YoY in 2026Q2, depending on the size of the tariff shock.”
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Consumer prices rose by 2.7% year-over-year in July. At the lower end of Rosenberg Research’s forecast, that implies the pace of inflation will more than halve in the next year.
Concerns about disinflation — which is when the pace of inflation slows — and deflation — when prices in the economy see an outright decline — are scant on Wall Street. Forecasters are generally more concerned about inflationary pressures from tariffs.
In a separate report this month, Rosenberg said he saw a deflation shock hitting the US, thanks to pressures like Trump’s immigration crackdown and the aging US population, which could curb consumer spending.
Jay Hatfield, the CIO of Infrastructure Capital Advisors, said he also sees the makings of a deflationary trend in a recent note.
“The key drivers of inflation are excessive money supply growth and oil prices. Both of these leading indicators are down double digits Y/Y, which indicates we are headed for deflation on market based/real time measures of inflation,” he wrote.
Research firm Pantheon Macroeconomics predicts a decline in housing prices offsetting around half of the inflationary impact of tariffs.
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