RBC Forecasts US Stagflation Lite Scenario for 2026

Royal Bank of Canada economists forecast that the United States is heading toward a stagflation lite scenario in 2026. This outlook is characterized by below-trend economic growth and core inflation that is expected to remain stubbornly above 3% for most of the year.

The bank identifies four primary drivers for this trend: rising home values and owners' equivalent rent, sticky private sector wage growth, heavy government spending that could hinder medium-term productivity, and consumer goods tariffs introduced by Donald Trump. Analysts predict the price impact of these tariffs will peak in the second quarter of 2026.

This economic environment creates a policy dilemma for the Federal Reserve System, as persistent inflation limits the central bank's capacity to cut interest rates to stimulate growth. Other indicators provide a mixed outlook, with the Federal Reserve Bank of Atlanta expecting third-quarter year-over-year GDP growth of approximately 3.9%, while the Congressional Budget Office projects a $21.1 trillion deficit over the next decade.