The 2025 Inflation Myth: Why Sticky Services Won’t Stop the Drop
By Kuan | Miyama Capital
The November CPI print (2.7% YoY) didn’t just confirm the disinflation trend. It destroyed the market’s biggest fear: that “sticky service inflation” would keep rates higher for longer.
The narrative on Wall Street is that a strong service sector equals high inflation. The data says otherwise.
Here is a deep dive into the three myths clouding the market’s judgment right now: the Employment Myth, the Services Myth, and the Path Divergence.
Myth 1: The “Sticky Services” Fallacy
The current bear case goes like this: “Services are booming → Service inflation is sticky → CPI stays above 2.5%.”
The data just punched this theory in the face.
The Elephant in the Room is Falling
People forget that the biggest component of “Services” in the CPI is Shelter (about 34%).
Fact: Shelter inflation has dropped to 3.0%.
The Lag: Because rent data lags reality by 12–18 months, the market rent declines we saw in 2024 are only just starting to hit the official CPI print.
The “Super Core” is Already There
Here is the most critical data point almost no one is talking about:
All items less food and shelter: 2.5% YoY.
This means if you strip out the lagging Shelter component, US inflation is already at 2.5%. As Shelter continues its mathematical catch-up downward, the probability of headline CPI dropping below 2.5% is extremely high.
Sticky services are not a wall. They are a speed bump.
Myth 2: Services Are Not “Overheating,” They Are Bifurcating
We need to stop treating “Services” as a monolith. The sector is splitting in two:
The Cooling Group: Services less energy services (YoY 3.0%). This shows no sign of re-acceleration.
The Sticky Group: Services less rent of shelter (YoY 3.5%). This is driven almost entirely by Medical Care (Hospital services are up 5.7%).
The Conclusion: It is not that “Service inflation is stuck.” It is that the massive downward force of Shelter is overpowering the specific stickiness of Medical Care. We will see a step-function decline in CPI. The “last mile” to 2% might be slow, but the direction is mathematically locked in.
The Real Risk: The CPI-PCE Divergence
In the coming months, we will likely see a confusing divergence that will test the Fed’s patience.
CPI will drop fast. Why? Because it heavily weights Rent (~34%), which is crashing. The market will scream, “Inflation is dead! Cut rates!”
PCE will fall slowly. Why? Because PCE heavily weights Medical Care (~17%) and barely cares about Rent (~15%). As long as hospital services remain expensive (due to government/employer pricing opacity), PCE will stick around 2.8%.
The Scenario: The market sees low CPI and rallies. Powell looks at high PCE and hesitates. This lag is the volatility trap.
Myth 3: Employment Growth = Inflation
The market sees non-farm payrolls rising and assumes the economy is roaring. Look closer.
Recent job growth is concentrated in two sectors: Government and Healthcare.
These are interest-rate insensitive sectors.
Tech, Finance, and Manufacturing have already stopped hiring or are quietly cutting.
Why Government Jobs Don’t Cause Inflation
If the government hires 10,000 more clerks, does the price of your burger go up? No.
Government services are mostly free or fixed-price.
These jobs act as a floor against deflation (by providing income to consumers), not an engine for inflation.
This is a warning sign, not a strength. The “strong economy” is being masked by non-cyclical government spending. If that budget tightens, the employment picture gets ugly fast.
The Consumer Negative Loop
The “Service Inflation” narrative assumes consumers have infinite money. They don’t.
Pandemic savings are gone. Credit card delinquencies are rising.
I am seeing clear signs of consumption downgrading among low-to-mid income groups.
Services rely on confidence. When consumers run out of cash, they cut travel and dining first.
Less Consumption → Lower Corporate Revenue → Layoffs → Even Less Consumption.
This is a negative feedback loop. The pricing power of service companies is vanishing. When demand dies, supply-side inflation (sticky prices) collapses. It is inevitable.
Conclusion: From Inflation Fear to “Hard Landing” Fear
We have spent too much time worrying about whether inflation will hit 2%.
The real risk for late 2025 is not inflation. It is a Hard Landing.
The Fed’s doves are starting to realize this. They see the Hiring Rate collapsing. They know rent data is lagging.
If the Fed keeps rates high because of “Sticky PCE,” they risk driving the economy off a cliff.
My Take:
If the market panics because of “Sticky Medical Inflation” or a slow-moving PCE, buy the dip.
The leading indicators (CPI Rent, Hiring Rate) are screaming that the war on inflation is over. The Fed will eventually be forced into preventative cuts—not to save prices, but to save jobs.