RBC Predicts Stagflation-Lite in 2026 Due to Housing Costs, Tariffs

RBC has raised concerns about a potential economic scenario in the United States by 2026, which they describe as “stagflation-lite.” This situation could manifest as below-trend growth accompanied by persistently high inflation.

Understanding Stagflation-Lite

The RBC report predicts that the core inflation rate will remain above 3% year-over-year for the majority of 2026. Stagflation, even in its moderated version, poses a significant challenge for economic policymakers, particularly the Federal Reserve (Fed), as high inflation complicates efforts to reduce interest rates.

Key Factors Influencing Stagflation-Lite

• High Housing Costs: Rising housing expenses contribute significantly to inflation. In September, home values saw a year-on-year increase of 1.3% according to the S&P Case-Shiller US National Home Price Index. Additionally, homeowners’ equivalent rent also grew by 3.7% during the same period. These factors are likely to add upward pressure on core Consumer Price Index (CPI) metrics.
• Sticky Wage Growth: Wage inflation remains a critical element. The average wages for private sector workers increased by 3.8% year-over-year in September. RBC noted that core services inflation, excluding housing costs, has not experienced a decline in the past four decades, largely driven by consistent wage growth.
• Consumer Goods Tariffs: Inflation in goods prices is anticipated to persist due to ongoing tariffs. After the disruptions caused by the pandemic and subsequent normalization of supply chains, tariffs reintroduced during the previous administration continue to pressure consumer prices. RBC forecasts that goods prices will peak in the second quarter of 2026.
• Heavy Government Spending: While government spending is often viewed as a stimulus, RBC suggests it may infringe upon growth in the medium term. High public sector expenses could translate into reduced productivity and contribute to inflationary pressures, particularly as the US is projected to face a $21.1 trillion deficit over the next decade.

Economic Outlook

The economic landscape for 2026 shows signs of stagnation amid high inflation. The current trajectory indicates a potential GDP growth rate of around 3.9% year-over-year for the third quarter, as per Atlanta Fed forecasts. However, the combination of housing costs, wage pressures, tariffs, and government spending could create a challenging environment for recovery.

Overall, the RBC report underscores the complexities of navigating economic policy in the face of stagflation-lite, urging close monitoring of these influencing factors.