Global Inflation: The Last Mile Is the Hardest
Headline inflation has cooled, but core services remain sticky. Why the final stretch to 2% targets could take longer than consensus expects.
The global inflation shock is fading, but it is not gone. Across the United States, the euro area, and the United Kingdom, headline inflation has fallen sharply from its 2022-2023 peaks, driven mostly by the normalization of energy prices and the healing of supply chains. The easy progress, in other words, has already been made.
Goods Disinflation vs. Sticky Services
The divergence between goods and services is the defining feature of this phase. Goods prices have disinflated aggressively — and in some categories outright deflated — as inventory gluts and cheap Asian manufacturing capacity restored supply. Services inflation, by contrast, remains stubborn. Shelter, insurance, healthcare, and hospitality costs continue to rise well above target-consistent levels.
The reason is structural: services prices are dominated by labor costs, and labor markets remain tight by historical standards. Wage growth has cooled but is still running above the pace consistent with 2% inflation. Until wages normalize further, services inflation will act as a floor under the headline number.
The Last Mile Problem
Economists have long observed that the final leg of disinflation is the hardest. The "last mile" from 3% to 2% tends to be slow and bumpy, because it requires squeezing out domestically-generated inflation — the kind embedded in wages and price-setting behavior — rather than simply benefiting from falling commodity prices.
This is why central banks are hesitant to declare victory. The more likely scenario is a prolonged holding pattern: rates stay restrictive for longer than markets anticipate, and the journey back to target stretches into 2027.
Investment Implications
"Higher for longer" is not fully priced. Real yields could remain elevated, which pressures long-duration assets and supports caution on growth-sensitive equities. Inflation-linked bonds and supply-constrained commodities remain the most direct hedges. The lesson of the past three years is that inflation, once embedded, does not surrender quietly.