Sticky prices, sticky expectations
Despite cooling headline inflation, core price pressures remain stubborn. Housing, healthcare, and services inflation continue to exceed pre-pandemic norms. While goods inflation has normalized, shelter costs rose 5.2% year-over-year in September 2025, and wage growth in services remains near 4.3%.
Data table: Inflation by category (YoY %)
| Category | 2023 | 2024 | 2025 |
|---|---|---|---|
| Goods | 2.5 | 1.1 | 0.8 |
| Services | 5.6 | 4.4 | 3.9 |
| Shelter | 6.9 | 5.8 | 5.2 |
| Wages (Avg. Hourly Earnings) | 4.5 | 4.2 | 4.1 |
Sources: BLS, Federal Reserve Economic Data (FRED).
Policy trade-offs intensify
The Fed’s restrictive stance is gradually cooling inflation expectations, but risks persist. Supply-side factors—such as energy transition costs and insurance premiums linked to climate risk—continue to drive baseline inflation higher than the 2% target. The risk of over-tightening remains.
Forward guidance and market response
Markets are pricing in two rate cuts for late 2026, contingent on inflation falling below 2.5%. The Fed’s credibility depends on maintaining flexibility without signaling premature easing. A “stop-and-hold” strategy is emerging as the consensus path.
Strategic implication
Business leaders should plan for a sustained 3% inflation regime through 2026. Pricing discipline, supply-chain diversification, and data-driven wage benchmarking will be essential for preserving margins in this higher-for-longer environment.