Canadian Analysis

While the broader economy has been weak, the softening has largely been concentrated in the business sector and particularly the export-intensive manufacturing industries. Consumer demand in the meantime has outperformed, and it is consumer demand relative to available supply that sets the pace of growth in consumer prices. Prices for domestically produced and consumed non-shelter services have been rising faster than overall inflation this year.

In 2026, both we and the bank of Canada expect core inflation will continue to unwind but remain above the central bank’s 2% target. Relative to that base case, we see risks tilted to the upside. Here, we look at the key drivers that we expect are tailwinds for consumer spending and inflation next year:

1. Per-capita consumer spending is accelerating despite trade war jitters

Canadian consumer spending has broadly outperformed expectations this year. Household consumption volume grew an average annualized 2.5% rate in Q1 and Q2, down from the 4.6% pace over the second half of 2024 but still historically strong.

And population growth has slowed sharply after the federal government slashed permanent and temporary resident arrivals. That means spending growth has actually been accelerating on a per-capita basis, rising by 2.4% on a yearly basis in Q2 2025, the fastest pace in three years.

Strength in purchases is echoed in our tracking of RBC card transactions, which shows sustained increases across major consumer spending categories over the summer and into the fall.

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2. Labour markets weakness has been concentrated in slower hiring rather than faster firing

The acceleration in per-capita consumption was despite a softer labour market. Much of the pain of a rise in the unemployment rate has come from a sharp deterioration in hiring of new entrants into labour markets – disproportionately among younger workers – rather than layoffs of existing employees.

Younger Canadians account for a smaller share of total domestic spending than older age cohorts. Statistics Canada data shows that households with a primary income earner under age 35 spend 20% to 40% less on average than older households with primary income earners aged 35 to 65.

Weaker labour markets remain a downside risk, but the unemployment rate has plateaued at around 7% and we expect a gradual rebound will support a recovery in both household income and spending power in 2026.

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3. Mortgage renewal headwinds easing following BoC rate cuts

Rising mortgage payments as ultra-low pandemic era interest rates reset at higher levels were one of the major headwinds to household spending in the past two years – and a large share of outstanding four- and five-year fixed rate mortgages will continue to renew at higher rates relative to the lows in 2020 and 2021.

Still, the size of the overall mortgage cliff has been effectively reduced by BoC rate cuts since 2024. Payment increases among those renewing at higher rates are more limited than they would have been, and a sizable share of outstanding mortgages with shorter durations (24% as of December 2024 according to the Bank of Canada’s estimates) will actually see a decrease in payments by the end of next year.

4. Household balance sheets are in a better shape

While the share of household incomes used to pay mortgage costs (mortgage debt service ratio) remains higher at close to record levels, lower debt payments on non-mortgage consumer debt has offered relief and restored some purchasing power back to households. As a result, the overall debt service ratio in Q2 from mortgage and non-mortgage debt combined was actually below where it was in 2019.

And strong financial markets have boosted household net worth. The gains have not been evenly distributed with more amassed by wealthier households. But they still add to aggregate purchasing power, offsetting softening household income growth this year from a weak labour market.

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5. Limited U.S. tariff spillover to-date but risks remain

With the Canadian government dropping most counter-tariff measures, Canadian importers are, in most cases, not directly paying tariffs. Still, rising input costs among U.S. producers could spill over via tightly integrated trade production lines to Canadian buyers.

Integrated supply chains could muddy the water on whether a product is an import or an export, with intermediate products crossing the U.S./Canada border multiple times in the production process. That means that even a unilateral one-sided U.S. import levy can raise costs across North American supply chains.

In 2021, Statistics Canada’s estimated that as much as 13.3% of household consumption in Canada was imported from the U.S., with about 7.5% accounting for final goods and the rest accounting for intermediate products that fed into Canadian production before reaching consumers. Observed tariff-driven price increases have been subdued in the U.S. to-date but could spill over to Canada once they show up more significantly in 2026.

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About the Author

Claire Fan is a Senior Economist at RBC. She focuses on macroeconomic analysis and is responsible for projecting key indicators including GDP, employment and inflation for Canada and the US.

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