08:20 AM EST, 01/08/2025 (MT Newswires) -- Canadian annual inflation is expected to remain below 2% for 2025, sid RBC.

That's good news for households, who will see incomes rise faster than inflation this year, noted the bank. Wages have increased more than prices from pre-pandemic levels --average hourly earnings are up 23% from 2019 compared with a 19% increase in average prices.

However, income gains have been uneven and a different mix of inflation -- such as prices for essentials like food and shelter outpacing average price growth -- will continue to be a challenge, particularly for households at the lower end of the income distribution, stated RBC.

Monetary policy is currently too restrictive for inflation to be sustainably at target, which will lead the Bank of Canada to further ease policy with more interest rate cuts in 2025, according to RBC. The downside risk to inflation is that the central bank doesn't cut rates fast enough to support a dwindling economy.

The upside risk to inflation is that nominal wages could persist at higher levels for longer, added the bank. A significant acceleration in housing market activities, although not in RBC's base case, could also add to shelter inflation.

A weaker Canadian dollar (CAD or loonie) is unlikely to import significant inflation, but the bigger external risk is a tit-for-tat tariff standoff affecting a large range of consumer goods, pointed out the bank.

Overall, RBC is more concerned with the downside risks than the upside risks.

Businesses will find it harder to pass on higher costs to customers, limiting the upside to profit margins, and requiring continued focus on efficiency and cost management.