{"id":30002,"date":"2026-10-27T14:39:04","date_gmt":"2026-10-27T18:39:04","guid":{"rendered":"https:\/\/www.rbcwealthmanagement.com\/en-us\/?p=30002"},"modified":"2026-10-27T14:39:05","modified_gmt":"2026-10-27T18:39:05","slug":"october-executive-briefing-the-price-of-us-strength-is-getting-steeper","status":"publish","type":"post","link":"https:\/\/www.rbcwealthmanagement.com\/en-us\/insights\/october-executive-briefing-the-price-of-us-strength-is-getting-steeper","title":{"rendered":"October Executive Briefing:\u00a0The price of U.S. strength is getting steeper"},"content":{"rendered":"\n
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\u201cIt\u2019s hard to bet against the U.S. economy\u201d has been our core narrative this year, and fundamental pillars remain intact, but inflation is making it harder to ignore the cost of this strength.<\/p>\n\n\n\n

The inflation pipeline is heating up at every stage, the Federal Reserve has begun to tighten, cracks amid consumers are unevenly distributed and the cost of doing business is rising.<\/p>\n<\/div>\n\n\n\n

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Rate hikes will work to tamp down demand-driven price pressures, but they also warrant close monitoring of an unintended consequence: higher interest income flowing to upper-income consumers and retirees, supporting the very cohort that is arguably the least rate-sensitive and most responsible for the spending keeping consumer inflation elevated.<\/p>\n\n\n\n

We still expect a total of 75 basis points of tightening including September\u2019s increase, but now expect the remaining to be delivered by the end of Q1 2027 rather than year-end. A slower pace buys the Fed time, particularly since a resolution of the Iran conflict\u2014not the federal funds rate\u2014is key to cooling supply-driven inflationary pressures dominating the current backdrop.<\/p>\n\n\n\n

The U.S. economy isn\u2019t breaking\u2014but the price of staying on this path is getting steeper. The unemployment rate (U3) did tick up to 4.2 percent, though the move was largely a rounding artifact, and every alternative measure of unemployment\u2014U1 through U6\u2014held steady or improved.<\/p>\n\n\n\n

The real challenge is inflation. Risks are rising, and elevated bond yields pose a broader challenge beyond the household sector. Businesses and governments face higher debt-servicing costs with varying lags, and those more leveraged are particularly sensitive.<\/p>\n\n\n\n

For governments, rising debt-servicing costs generally mean one of three things: spending cuts, tax hikes or larger deficits. Bond yields have risen significantly recently, and concerns over fiscal sustainability are mounting. Rising interest rates feed directly into the fiscal challenge, materially worsening the debt-to-GDP trajectory from an already concerning baseline.<\/p>\n\n\n\n

The pain of higher rates, meanwhile, is unevenly distributed\u2014households taking on new debt feel the impact first. As existing borrowing continues to renew and new debt is added at higher rates, effective borrowing costs across households should trend upward, pushing the debt-service ratio higher despite relatively low overall household indebtedness measured by debt-to-income.<\/p>\n\n\n\n

September CPI is just the tip of the iceberg<\/h2>\n\n\n\n

The Consumer Price Index delivered an uncomfortable upside surprise. Core inflation rose 0.3 percent month-over-month, and the year-over-year pace reaccelerated to 2.6 percent. Core goods\u2019 prices were particularly problematic. Categories dominated by imports recorded some of their largest monthly price gains on record.<\/p>\n\n\n\n

This is a tariff and transportation cost story that is only beginning to show up in consumer prices. The pipeline looks more concerning, and the breadth is confirmed across indicators: the ISM price indices, Producer Price Index (PPI), NFIB price data and import price index all point in the same direction.<\/p>\n\n\n\n

Freight costs remain exceedingly elevated, and for most product categories, higher costs appear to be passed on to consumers\u2014supported by positive trade services margins.<\/p>\n\n\n\n

The uncomfortable reality is that the September CPI doesn\u2019t fully capture upside risks still building from tariffs and energy prices. Our base case forecast of 2.5 percent core CPI in 2026 remains intact, but there are signs of more problematic energy-price spillover across a range of categories, especially as more than half the CPI basket continues to run at three percent or above.<\/p>\n\n\n\n