In 2021–2022, the inflation surge was dominated by goods: supply chains broke, semiconductor shortages hit, used car prices doubled. By 2024 goods disinflation had done most of the work — US goods inflation fell near zero. But services inflation stayed stubbornly elevated, keeping headline and core CPI well above 2% targets across advanced economies. Understanding services inflation requires understanding what makes it different from goods inflation at a structural level.
Why wages drive services prices
The inputs to a manufactured good — materials, energy, capital — are globally tradable and prices fluctuate with markets. But the primary input to most services is labour. A haircut is mostly the barber's time; a restaurant meal is mostly kitchen and serving staff wages; a legal consultation is entirely human capital. BLS Employment Cost Index data shows that private-sector services wages were growing at 4.5–5% in the US through 2026 — directly feeding into prices. The ECB Economic Bulletin has repeatedly cited services inflation persistence as the primary obstacle to returning to 2% HICP. The relationship between wages and services prices is direct: higher wages → higher service prices → higher CPI.
Sticky pricing: why services don't adjust quickly
Goods prices at supermarkets can change weekly. Services prices — gym memberships, insurance premiums, school fees, healthcare charges — often reset once a year or less. This "menu cost" inertia means services inflation responds slowly to both demand and supply changes. Academic research (summarised in the BIS working paper on price-setting in services) finds services prices reset on average every 4–6 months vs 2–3 months for goods. When wages rise, it takes multiple pricing cycles for the full effect to show up in measured services CPI — creating the appearance of "stickiness" that is really a timing effect.
The "last mile" problem
Getting inflation from 5% to 3% was relatively easy — goods disinflation and energy price reversals did most of the work mechanically. Getting from 3% to 2% requires services inflation to fall, which requires wage growth to fall, which requires labour markets to soften. This asymmetric difficulty is what central banks call the "last mile" problem. The IMF WEO and OECD Economic Outlook both project services inflation to remain above 3% in most advanced economies through 2026. Explore how services vs goods inflation has diverged across countries on our inflation explorer.