U.S. Analysis

Importantly, with (permanently) missing October CPI data, and later-than-usually collected November price data, we still don’t have a precise and clean read of inflationary dynamics in the fourth quarter of 2025. What we do feel comfortable saying is that services inflation is still above pre-pandemic levels in part because of a tight labor market, and that tariff passthrough to goods inflation is likely to peak in the second quarter of 2026. That is, tariff passthrough isn’t complete just yet. As such, we continue to believe that core inflation in the U.S. will remain in the 2.5-3.0% year-over-year range for most of 2026, above comfort level though not accelerating.

The good news is that despite stickiness in prices above “target”, inflation is on balance moderate enough to keep consumer spending resilient in the United States, particularly, for the upper end consumer. Real earnings have been positive for over two years, floating around 1% year-over-year. That’s not stellar or a booming economy, but it’s also not a deterioration.

Zooming out big picture, we may be seeing some decoupling between stronger economic activity and relatively contained inflation. It’s early days for proclamations, but if we have accelerating growth without a matching inflation profile, productivity is perhaps more in play than have been able to see so far.

Within December’s CPI print, three key categories are worth emphasizing.

• Core goods inflation has been accelerating since September 2024 partly thanks to a post-pandemic normalization but also some tariff pressure. But in December, core goods flatlined 0.0% m/m. That might seem like tariff pressures were zero, but the category was pulled down heavily by used cars, while apparel jumped quite a bit to +0.6% m/m. We still expect tariff pressures will peak in Q2 2026 before dissipating. Note that even if the SCOTUS were to rule against the administration’s usage of IEEPA, (i.e., to impose tariffs unilaterally), we don’t expect core inflation would return to the 2% target in 2026.

• Importantly, food inflation is up 0.7% m/m and 3% y/y – that’s the highest since August 2022- with most leading indicators suggesting more upside ahead. Food is a solid 13.7% of CPI, but it also disproportionately impacts low- and middle-income Americans and is easy for consumers to “observe”. We will be watching food inflation very carefully heading into the midterm elections.

• The critical Owner’s Equivalent Rent (OER) calculation is a bit stronger at 0.3% m/m and is running at 3.4% y/y. At a whopping 26.5% weight in the U.S. CPI basket, OER is keeping a floor under how weak headline inflation can fall even with unexpected pauses in core goods inflation and mollification of services inflation. That weight may even increase in 2026. Yet, while OER is all at once extraordinarily important to the headline forecast, it’s long lags with real-time measures of rents and a poor track record of representing true housing costs to Americans mean it is decreasingly relevant to true affordability concerns or direct consumer implications. As a result, consistently viewing inflation through services ex-rent (that rose 0.2% m/m in December) may be more relevant than the headline Consumer Price Index alone.

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Frances Donald is the Chief Economist at RBC and oversees a team of leading professionals, who deliver economic analyses and insights to inform RBC clients around the globe. Frances is a key expert on economic issues and is highly sought after by clients, government leaders, policy makers, and media in the U.S. and Canada.

Mike Reid is a Director, Head of US Economic Research at RBC. He is responsible for generating RBC’s U.S. economic outlook, providing commentary on macro indicators, and producing written analysis around the economic backdrop.

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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