4 reasons the economy’s worst-case scenario could be looming in 2026

• RBC thinks the US is on track for “stagflation lite” in 2026.

• Stagflation is a dreaded economic scenario in which inflation runs hot while economic growth slows.

• The bank pointed to factors like high housing costs and tariffs, which suggest stagflation is looming

The worst-case scenario for the US economy could be a looming reality in 2026.

RBC flagged the likelihood of stagflation in 2026 as the economy looks poised to post below-trend growth while inflation runs “uncomfortably” hot.

“Heading into 2026, we see a US economy that is increasingly on track for a stagflation lite scenario,” economists at the bank wrote in a client note on Wednesday. “It’s a confluence of factors that will create an uncomfortable environment where we forecast core inflation will remain stubbornly above 3% y/y for most of the year,” they added.

Stagflation — even a “-lite” version — is a troubling prediction for the US economy. The situation is often harder for the Fed to resolve than a typical recession, as higher inflation prevents the central bank from cutting interest rates to stimulate the economy.

Here are reasons the bank thinks that scenario is becoming more likely:

High housing costs are a key pressure that has propped up core services inflation, RBC economists said.

That measure of inflation, which excludes goods and volatile food and energy prices, is running at around 3.5% year-over-year, which suggests that price growth in the economy has more momentum.

Home prices have started to rise more slowly, but have sprinted considerably higher over the last five years and are still rising. Home values rose 1.3% year-over-year in September, according to the S&P Cotality Case-Shiller US National Home Price Index.

The owners’ equivalent rent of residences in the average US city, another measure of housing costs, also rose 3.7% year-over-year in September, according to Bureau of Labor Statistics data.

“Keeping in mind what [owners’ equivalent rent] represents—a hypothetical measure of what homeowners would pay themselves to rent their own homes—this means it’s on a path to add upward pressure to core CPI,” RBC said. “We simply don’t expect OER to provide much help in moving inflation back towards the Federal Reserve’s 2% target in 2026.”

Sticky wage inflation is also keeping inflation propped up, RBC said. The average hourly earnings of all employees in the private sector grew 3.8% year-over-year in September, according to the BLS.