Goods are getting cheaper. Services aren't

The November consumer price index print, which arrived at 7.1 per cent year-on-year, prompted widespread relief across risk markets, driven primarily by an outright 0.5 per cent month-on-month drop in core goods prices. Used cars, consumer apparel, and household appliances have finally succumbed to inventory liquidation and cleared logistics networks. But equity bulls hailing this as the definitive end of inflation are celebrating the easy half of the adjustment. Goods are indeed getting cheaper, but services—which constitute the vast majority of developed market economic activity—remain obstinately anchored to wage growth.

The mechanical divergence between goods and services exposes the dual-speed nature of post-pandemic price formation. The deflation in traded goods is largely a supply-side healing story: container rates have collapsed back to pre-pandemic baselines, microchips are once again plentiful, and retail inventories are bulging.

The Services Citadel

In contrast, core services ex-housing reflect domestic labour bargaining power, commercial rents, and contractual renewals. Unlike a flat-screen television or an imported sofa, an hour of legal counsel, medical care, or commercial HVAC maintenance cannot be shipped across an ocean from a lower-cost producer.

These contracts reset on annual or semi-annual cycles, baking in previous year compensation increases and institutional inflation expectations. Because services are consumed locally and require substantial direct labour inputs, their price momentum exhibits enormous structural inertia.

The Ceiling on Disinflation

The critical question for the Federal Open Market Committee is where headline inflation settles once core goods deflation exhausts its initial statistical impulse. If goods prices merely stop falling and level off, the headline index will be exposed to the unrelenting 5 per cent compounding of domestic services.

A policy rate of 4.5 per cent is sufficient to puncture consumer discretionary durable spending, but it lacks the precision to cool non-tradable service demand without precipitating outright labour market distress. Goods deflation can deliver a temporary optical truce on inflation, but winning the structural war requires crushing the services baseline—a task that leaves monetary policy with zero room for a premature pivot.