RBC Capital Market's Francis Donald Talks June CPI

Summary

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Podcast Summary: RBC Capital Market's Francis Donald Talks June CPI

Podcast: Bloomberg Talks
Host: Bloomberg
Guest: Francis Donald, Chief Economist, RBC Capital Markets
Release Date: July 14, 2026

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Episode Overview

In this episode, Francis Donald of RBC Capital Markets joins Bloomberg to dissect the latest US Consumer Price Index (CPI) report for June 2026. The conversation tackles whether recent disinflation is a fleeting anomaly or the start of a trend, the ongoing tension between supply-led and demand-led inflation, the outlook for rate hikes, and the resilience of the US consumer and economy heading toward 2027.

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Key Discussion Points & Insights

1. Initial Reaction to June CPI Report

• Headline vs. Core Inflation:

  • Francis notes that the flat core CPI reading was surprising and joked, “Oh, Kevin Wash is the most successful Fed chair ever. He's done it in a matter of weeks. He's solved for the inflation challenge in play.” (Francis Donald, 00:57)
  • However, she cautions that the decline was mainly due to a drop in energy costs, and that core elements like motor vehicle insurance and wireless services were volatile contributors.

• Persistent Inflation Concerns:

  • Despite the apparent progress, core inflation is still at 2.6%, above target for over five years.
  • Food prices remain elevated and are still likely to accelerate, while the labor market remains tight—a classic environment for demand-led inflation.

• Quote:

  • “It is too early to take our eye off the ball.” (Francis Donald, 01:48)

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2. Rethinking Inflation Targets in a Changing Global Environment

• 2.5% Core CPI Acceptable?

  • When asked if slightly higher inflation should be tolerated in a new global order, Francis suggests heresy would not be openly welcomed at the Fed:
    • “You'd probably be relegated to the basement with a few other colleagues who share the view, and you'd have to be really quiet about it.” (Francis Donald, 02:35)

• Supply vs. Demand-Led Inflation:

  • The Fed and other central banks can overlook supply-driven inflation (due to AI, tariffs, global disruptions)—but must stay vigilant against demand-led inflation, which is currently “about half” of headline pressures.
  • Demand-driven forces include strong nominal growth, a tight labor market, rising infrastructure spending, and the buying power of wealthy consumers.

• The Gilded Age 2.0:

  • “It is the Gilded Age 2.0, and you have an exceptionally wealthy top 1% consumer. Those are the types of things that drive demand led inflation.” (Francis Donald, 03:26)

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3. Fed Rate Outlook and Consumer Impact

• Rate Hikes or a Hold?

  • The current market expects nearly two more rate hikes, but Francis pivots the focus:
    • “I look at this number now from a different lens which is what does this inflation mean for the consumer?” (Francis Donald, 04:17)

• State of the Consumer:

  • Consumers, while seeing temporary relief from lower gas prices, are still squeezed by persistent high prices, dwindling savings, and the absence of tax refunds.
  • If another price shock arises later this year (in energy or food), “I don't believe this is a consumer that can withstand that. And you'll see pricing powers eroded.” (Francis Donald, 04:57)

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4. Economic & Market Outlook for 2027

• Longer-Term Confidence:

  • Despite uncertainty, Francis remains optimistic about the US economy due to continued infrastructure investment, productivity gains, and the resilience of high-income consumers.
  • “It's real hard to bet against the US economy.” (Francis Donald, 06:38)
  • She predicts “fortuitous math” will push inflation rates low in 2027 due to base effects, but real core inflation will stay in the “mid to high twos.”

• Base Effects vs. Lived Experience:

  • Interviewer notes how listeners dislike the concept of “base effects,” since groceries and daily necessities feel as expensive as ever.
  • Francis echoes: “Consumers care way less about year over year. They don't care about what Fed Wash is going to do. They care about the real economy...prices are too high and consumers, the mass consumer is still struggling under the weight of higher prices and the cost of living.” (Francis Donald, 07:01)

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Notable Quotes & Memorable Moments

• “Oh, Kevin Wash is the most successful Fed chair ever. He's done it in a matter of weeks. He's solved for the inflation challenge in play. Except that... [the results] are probably some volatile components like motor vehicle insurance and wireless telephones.”
  (Francis Donald, 00:57)

• “You'd probably be relegated to the basement with a few other colleagues who share the view, and you'd have to be really quiet about it.”
  (Francis Donald, 02:35, on tolerating higher inflation at the Fed)

• “It is the Gilded Age 2.0, and you have an exceptionally wealthy top 1% consumer. Those are the types of things that drive demand led inflation.”
  (Francis Donald, 03:26)

• “This is a consumer that may have had some reprieve now, but if we see another price shock in the second half of the year...I don't believe this is a consumer that can withstand that.”
  (Francis Donald, 04:57)

• “It's real hard to bet against the US economy.”
  (Francis Donald, 06:38)

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Important Timestamps

• 00:37 — Start of Francis Donald interview
• 00:57 — First reactions to June CPI
• 02:14 — On tolerable inflation in a changing world
• 03:26 — “Gilded Age 2.0” & demand-led inflation
• 04:17 — Fed reaction: focus on consumer pain
• 05:43 — Outlook toward 2027: US economic resilience
• 07:01 — Consumers’ lived experience with high prices

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Summary

Francis Donald delivers a nuanced and pragmatic assessment of the June 2026 CPI, calling for ongoing vigilance even as headline numbers appear to ease. While the Fed’s battle with inflation isn’t over—especially as demand drivers stay robust—the US economy remains uniquely strong on a structural basis. Nevertheless, for most American consumers, lingering high prices continue to bite. The episode offers realistic perspective and caution about getting too comfortable with recent data, tying together macro trends and day-to-day realities with notable clarity.

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Transcript

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[Interviewer]

We continue on the state of the American economy. Francis Donald joins us. Chief Economist, RBC Capital Markets. You've had all of eight minutes, Francis, to digest the CPI report. Is it a one off disinflationary tendency or do you detect a trend?

[Francis Donald]

Well, facetiously when I saw the core CPI come in flat, I thought, oh, Kevin Wash is the most successful Fed chair ever. He's done it in a matter of weeks. He's solved for the inflation challenge in play. Except that to your point, what we're seeing this month is entirely the energy drag explaining the headline decline. And there's enough going on in core CPI to tell us that these are probably some volatile components like motor vehicle insurance and wireless telephones. Those have dragged on core cpi, CPI underneath the surface. I am still concerned and firstly, I don't know that we should be saying inflation is totally solved when core inflation in America is still at 2.6%. We are over five years of inflation above target and we still have some pretty serious issues in the areas that matter most to consumers like food, which is up 3% and still likely to accelerate ahead and an extremely tight labor market. That reminds me of the good old fashioned demand led inflation which is still in the system as well. So I think two things can be true. We can celebrate that. We've had some reprieve here this month in many areas of the report. This is good news for Chair Warsh as he heads into testimony, but it is too early to take our eye off the ball.

[Interviewer Follow-up]

Francis, would I get thrown out of the Federal Reserve if I walked in and said, you know what, in today's world order, two and a half percent core cpi, that's fine. I mean in a world where there's globalization is, is, is going by the highway here and it's all, you know, every man for himself, costs are going to be higher. That's just the way it is. What happens then?

[Francis Donald]

Would you get thrown out? No, but you'd probably be relegated to the basement with a few Other colleagues who share the view and you'd have to be really quiet about it. I suspect that the way we have to think about inflation now is really comes down to this idea of what is supply led inflation and what is demand led inflation. And the San Francisco Fed actually breaks this out and what they see find right now is that it's about half supply given. And that's everything from AI to tariffs to the Strait of Hormuz coming through and created blockages. But half of it is demand led. And this is the area that the Federal Reserve can control and should control. So while we continue to focus on these big structural trends that are meaningful to price levels and price growth, I think this Federal Reserve is really going to struggle more with the old fashioned types of inflation. And that's because Tom, if you've highlighted many times this morning, nominal growth is big, very strong in America, the labor market is extraordinarily tight. There is a massive infrastructure build coming out. It is the Gilded Age 2.0 and you have an exceptionally wealthy top 1% consumer. Those are the types of things that drive demand led inflation. So the Fed can be excused and all central banks globally can be excused for wanting to look through supply led inflation that maybe brings us above 2% but they have to stay focused on demand side. And that's where Mike concern in the second half of the year is much more so than are we seeing energy coming up or down in a month to month.

[Interviewer Follow-up]

So from I'm looking at the work function here, still looking for almost two rate hikes this year. Does that seem reasonable to you leave

[Francis Donald]

the Fed on hold. And of course it's natural to say okay, well what does this number mean for the Fed? But I look at this number now from a different lens which is what does this inflation mean for the consumer? And tell us about the consumer because at the end of the day what will matter for most businesses, for anyone picking stocks for those who are trying to serve, is what is this telling us about the consumer? It's telling us that the consumer is not struggling under the same gasoline prices that they were last month. It's telling us there are certain items that they'll get some reprieve on. But it's still telling us that prices are too high for most consumers. And when you combine the CPI number with the fact that we no longer have tax refunds, that we have seen savings eroded, this is a consumer that may have had some reprieve now, but if we see another price shock in the second half of the year, Whether energy prices rise again, whether food prices rise or reprieve. I don't believe this is a consumer that can withstand that. And you'll see pricing powers eroded.

[Interviewer]

Francis, one final question, I think just to get us, you know, through the year and on into two. I haven't said this yet, 2027.

[Interviewer Follow-up]

No.

[Interviewer]

Are you ready for that?

[Interviewer Follow-up]

No.

[Interviewer]

I mean, Francis, I look at all the uncertainties, all the different threads in narratives off, off your desk. Is there a confidence to be in the markets? Given the economic confusion?

[Francis Donald]

It's not too early for 2027. We just had a meeting of when we were going to put out our 2027 outlook. It's July and we have to contribute forecasts for 2027. And when we look into 2027, what we see is it is still really hard to bet against the American economy. And that is because of the structural support coming from non that's infrastructure. You still have a wealthy top consumer and there's a lot of government money inside. There's productivity growth that is helping the American economy stay at or above 2% growth for the next 12 to 18 months. And as we head into 2027, I think what will be the biggest challenge for markets to digest is that you're going to get what I'm calling fortuitous math, which is base effects are going to bring inflation in the second quarter down next year into as low as 1.3%. Core inflation will not be that low. It'll be in the mid to high twos. Going to have to digest some pretty serious base effects. But if you combine those two stories together, as I continue to say, it's real hard to bet against the US economy.

[Interviewer]

Francis People are slowing down on i80 right now across America. Do you know how much our listeners hate base effects? They go to the grocery store and the base effect is when did I pay $7 for oranges? They used to be $3 exactly.

[Francis Donald]

Or Amber's prices are up 30% in five years. Consumers care way less about year over year. They don't care about what Fed Wash is going to do. They care about the real economy. And that's what numbers like this morning CPI tell us. They tell us there's some short term reprieve, but prices are too high and consumers, the mass consumer is still struggling under the weight of higher prices and the cost of living.

[Interviewer]

Frances, thank you so much, Francis.

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